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Some analysts think that these negative interest rates hurt the functioning of the financial sector. I’m agnostic on that point, but what’s clear is that with monetary policy stretched to its limits, Europe has no way to respond when things go wrong. Indeed, much of Europe may well already be in recession, and there’s little if anything the central bank can do.
There is, however, an obvious solution: European governments, and Germany in particular, should stimulate their economies by borrowing and increasing spending. The bond market is effectively begging them to do that; in fact, it’s willing to pay Germany to borrow, by lending at negative interest. And there’s no lack of things to spend on: Germany, like America, has crumbling infrastructure desperately in need of repair. But spend they won’t.
Most of the costs of German fiscal obstinacy fall on Germany and its neighbors, but there are some spillovers to the rest of us. Europe’s problems have contributed to a weak euro, which makes U.S. products less competitive and is one reason American manufacturing is sliding. But characterizing this as a situation in which Europe is taking advantage of America gets it all wrong, and is not helpful.
What would be helpful? Realistically, America has no ability to pressure Germany into changing its domestic policies. We might be able to provide a little moral suasion if our own leadership had any intellectual or policy credibility, but, of course, it doesn’t. There’s a sense in which the whole world has a Germany problem, but it’s up to the Germans themselves to solve it.
One thing is for sure: Starting a trade war with Europe would truly be a lose-lose proposition, even more so than our trade war with China. It’s the last thing either America or Europe needs. Which means that Trump is probably going to do it.
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