Germany in crisis: the unification challenge, macroeconomic policy shocks and traditions, and EMU

Jörg Bibow

International Review of Applied Economics, 2005, vol. 19, issue 1, 29-50

Abstract: Conventional wisdom blames Germany's ongoing economic and fiscal crisis on the unification shock of the early 1990s and structural problems in labour markets. Challenging this view, this paper offers a fresh assessment that focuses on macroeconomic demand management. It is shown that Germany's fiscal crisis cannot be attributed to unification per se; it arose as a consequence of ill-guided macroeconomic policies pursued in response to that event. Many structural problems that popped up along the way were mere symptoms of persistent macroeconomic mismanagement and protracted domestic demand stagnation. Arguably, systematically ill-guided macroeconomic policies of this type are potent enough to wreck any real world economy, no matter how flexible it may be. Because Germany provided the blueprint for Europe's stability-oriented macroeconomic policy regime, it comes as no surprise that a peculiar repeat of certain symptoms that started to arise in Germany a decade ago may now be observed across the euro area—protracted domestic demand weakness and inflation stickiness because of 'tax-push inflation' in particular.

Keywords: German unification; budgetary sustainability; tight money; policy inconsistency; EMU (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (23)

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DOI: 10.1080/0269217042000312597

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