Tuesday, November 05, 2013

What Really Irks Krugman About Germany

Paul Krugman really doesn't like Germany. He has in the latest week devoted note only one of his twice-weekly NY Times columns, but also half a dozen or so blog posts to attacking Germany. What has Germany done to make him so upset? Well, they have a large current account surplus, which Krugman claims is bad for the entire World economy because it is in a "liquidity trap".

But why Germany? There are countless countries over the world with larger relative surpluses, including for example Singapore, Saudi Arabia, Kuwait, Norway, Switzerland and the Netherlands. But Germany is the biggest in absolute terms (after having recently surpassed China), you say? So this means that if they break up Germany, the smaller political units would get off the hook?

And the notion that the entire world is in a "liquidity trap" is false too. Even if we for the sake of the argument accepts that theory, it is in fact the case that most countries in the world don't even have official short-term interest rates at zero. And except for Japan and Switzerland, no countries have long term yields close to zero. So there is more than enough room for German savings to push down interest rates around the world.

No, what really irks Krugman about Germany is two things. First of all, Germany has proven another of his predictions false. Krugman long asserted that for Southern European current account deficits to be eliminated, the German surplus must also be eliminated. Well, the Southern European deficits have now been eliminated, but the German surplus remains as large as ever, proving Krugman wrong.

The other thing that annoys Krugman is that Germany is a success story, with strong finances, low unemployment and high per capita growth "despite" the fact that it has a political culture dominated by semi-Austrian, anti-Keynesian ideas, and pursues policies of that kind.


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