We don’t see your attraction to fiscal largesse as a substitute. Periphery Europe cannot afford it and for Germany, which can afford it, fiscal expansion would be procyclical. Any overheating in Germany would exert pressure on the ECB to maintain a tighter monetary policy, backtracking some of the progress made by Mario Draghi. A better use of Germany’s balance sheet strength would be to agree on faster and bigger haircuts for the periphery, and to support significantly more expansionary monetary policy by the ECB…A few points:
- Germany cannot, will not, and probably isn't even allowed to agree to hair cuts that affect us due to the no bail out clause.
- Overheating in Germany? I would go along with Bavaria and Baden-Württemberg being at full employment but the other states? Especially eastern ones, really? Also every 5th employee in Germany is working for less than € 10.36, the actual number in this case might even be allot worse since companies with less than 10 employees do not have to report those numbers. Some overheating might therefore actually be helpful. Inflation in Germany was at 1.1 % in April. German 10 bunds are at 1.5 % as of now. So nothing is pointing towards an imminent threat of Germany overheating. Now to be fair. We are actually seeing pockets of some inflation. Munich (capital of Bavaria) is the prime example. We have come to a point where "being chosen" to be the one who is "allowed to rent" a flat in the city and therefore pay is almost an honor. Also in that are even getting a quotation from a craftsman can be close to impossible at realistic prices around munich. But, again we are talking about some areas; there is absolutely no reason to believe that at the moment that Germany is even close to overheating. I'll go even further, there is a lot of room for stimulus before Germany as a whole will experience significant inflation.
- Pro cyclical? I don't know what the current fantasy is in the US about German growth, but here in the real world, we barely managed to stay out of a new recession.
- I expect that the actions by the Bundesbank in the last few years, have significantly reduced its influence within the ECB. The Bundesbank will in June openly fight against the ECB's OMT programme before the German constitutional court. In case the court follows the Bundesbank opinion, the situation might significantly change in the euro zone. If it does not, the Bundesbank's influence will probably be largely wiped out within the ECB. So either there might be extensive backtracking totally independent of "overheating", or the ECB will be basically free of the nay sayer Weidmann.