More Krugman. I know Chris would have posted this, but he's in London trying to drum up business. So it falls to me to scare the hell out of everyone over the economy.
There’s an extraordinary — and extraordinarily depressing — interview in Newsweek with Peer Steinbrueck, the Germany finance minister. The world economy is in a terrifying nosedive, visible everywhere. Yet Mr. Steinbrueck is standing firm against any extraordinary fiscal measures, and denounces Gordon Brown for his “crass Keynesianism.”I noticed something similar in the past year in Europe. While our economic indicators were heading south, it seemed a lot of people in Europe felt that this was an "American problem," and that their housing market, banks, and overall economies were just peachy. Yeah, not so much.
You might ask why we should care. Germany’s economy is the biggest in Europe, but even so it only accounts for about a fifth of EU GDP, and it’s only about a quarter the size of the US economy. So how much does German intransigence matter?
The answer is that the nature of the crisis, combined with the high degree of European economic integration, gives Germany a special strategic role right now — and Mr. Steinbrueck is therefore doing a remarkable amount of damage.
Here’s the issue: we’re rapidly heading toward a world in which monetary policy has little or no traction: T-bill rates in the US are already zero, and near-zero rate will prevail in the euro zone quite soon. Fiscal policy is all that’s left. But in Europe it’s very hard to do a fiscal expansion unless it’s coordinated....
And if Germany prevents an effective European response, this adds significantly to the severity of the global downturn.
