A policy that may work for Germany alone cannot work for an economy more than three times as big, writes Martin Wolf.
Might the policies of the eurozone result in a robust recovery? My answer is: no. Since the eurozone generated 17 per cent of world output in 2013 (at market prices), that answer has global significance.
It is Germany that set the economic strategy of the eurozone. It consists of three elements: structural reform; fiscal discipline; and monetary accommodation. So far, this set of policies has failed to generate adequate demand: in the second quarter of 2014, real demand in the eurozone was 5 per cent smaller than it was in the first quarter of 2008.
Both France and Italy are being encouraged to accelerate “structural reforms” as a way to reignite growth in their own economies and so, given their importance, also in the eurozone. These two countries generate 38 per cent of eurozone gross domestic product, against 28 per cent for Germany alone. In both economies, the recommended programmes involve liberalising the labour market. They are both being encouraged to follow Germany’s “Hartz reforms”, introduced between 2003 and 2005, to which the country’s relatively good recent labour market performance is often attributed.
Yet the one thing those reforms did not do is create dynamic aggregate demand. Between the second quarter of 2004 and the second quarter of 2014, Germany’s real domestic demand grew 11.2 per cent, a compound annual rate of 1 per cent. It could have been worse. But this is hardly the performance of a “locomotive.”
© Financial Times
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