Monday, December 5, 2011

When will Germany start living beyond its means?

In most of my posts on the southern Europe debt crisis I've focused on the contractionary nature of fiscal retrenchment, and the 'paradox of thrift' it engenders - that by retrenching, Southern Europe risks shrinking its GDP, thus cancelling out any putative gains from austerity.

Paul Krugman, in response to Ezra Klein, reminds us that there is another big obstacle to this strategy: that Southern Europe cannot recover without unwinding its trade deficit, and its trade deficit is the counterparty to the German trade surplus.

In other words, are the Germans willing to run a trade deficit to make this happen? Because if they are not, it's not going to work. And nothing I've heard out of Berlin recently sounds like coming close to recognizing this.