Posted on January 25, 2012 - by invest

Angela Merkel would consider a euro-zone fiscal stimulus

A RECENT survey by the French research institute IFOP found that in the eyes of the French, Angela Merkel represents those values that are commonly associated with Germans (serious, disciplined, hard-working, sincere and so on). The study, which was commissioned by the German embassy in Paris, also reported that 62% of respondents thought that France should learn from German economic and social policies—although I am not sure about the framing of that question in French.

Ms Merkel herself disagrees with such stereotyping, as she reveals in a forthcoming interview with several European newspapers. However, she seems to agree that the rest of Europe should learn from Germany’s past economic policies. According to a preview of the interview (auf Deutsch) by the German Süddeutsche Zeitung, she argues that fiscal prudence, while a necessary prerequisite for more solidarity, is not enough. Troubled euro-zone countries also need to tackle reforms like improving labour market flexibility, and they must open up closed professions and businesses. This is a welcome shift of emphasis away from short-term austerity and towards medium-term fiscal prudence and growth-enhancing reform.

On top of that, she signalled her willingness to support fiscal stimulus in the euro zone. She proposes that unused European funds be deployed to support small and medium-sized enterprises (SMEs) as well as entrepreneurs and R&D in the affected countries. How that is supposed to work in practice, however, is less clear. It seems at least that this would take funds away from the regional development budget that invests a large share in Eastern European member states of the EU. Details aside, this would be a useful policy, as has been argued here before: if monetary policy—the usual stabilisation method of choice—is set externally or on a supranational level, fiscal policy does have a large impact on the economy. And because the downturn in, say, Portugal is also based on temporary factors, fiscal stimulus from the EU could help to limit the damage to the economy while it is adjusting.

Going into the summit, with pressure rising on Germany (for instance by the IMF), Ms Merkel may want some additional leverage to force countries to reform. As the exchange of binding fiscal rules for more German and ECB support shows, she may well get what she wants. The new deal would be: actual reforms (not mere promises) in return for regional fiscal stimulus that targets useful endeavours rather than an inefficient bureaucracy. If agreed on, this might be one of the most promising deals of this euro-zone crisis.

The interview will be published by El Pais (Spain), the Guardian (Britain), La Stampa (Italy), Le Monde (France), Gazeta (Poland) and Süddeutsche Zeitung.

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