Nov. 23, 2005
The recently formed grand coalition between the SDP and Mrs.Merkel's Christian Democrats faces a major dilemma. The Merkel Conservatives would like to impose neo-con style reforms of the labour market practices and the welfare state in Germany.
Most of these are wisely resisted by the SDP. But the SDP has agreed to significant tax increases. Tax increases when the unemployment rate is above 11% are not a smart idea. Coupled with the dogmatic monetarism and tight money policies of the European central bank the result is likely to be higher not lower unemployment.
The European central bank needs a major overhaul and rethink of its strict monetary targeting. The rigid anti-deficit rule that prevails in the European Union also needs to be reformed. Its not possible to fight dangerously high unemployment with both the fiscal and the monetary hand tied behind your back.I wonder how long it will be before either the Christian Democrats or their SDP partners wake up to this reality?
Labour market clearing strategies that rely upon the neo-Keynesian doctrine of rigidities explaining why general equilibrium does not always hold sometimes are useful. But this time in Germany they are too close to the classical laissez-faire economic doctrine of the 1930s that insisted despite enormous evidence to the contrary that unemployment was due to rigidities rather than inadequate aggregate demand.
The European central bank and the resistance to using budget deficits to stimulate are the true culprits. Lets hope the political leadership in Germany comes to realize this soon.
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