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Wednesday, November 16, 2011

Martin Wolf on Rome's Burning

Martin Wolf in the FT makes an interesting case for Europe (i.e., Germany) saving Italy from self-immolation. Unfortunately, he seems to suggest that this can only be done by Germany coughing up lots of dough. Why this is both economically and politically not a sensible approach is explained in my comment on his article (but his charts are well worth examining - click on the link on the left half way down the text):
What is more important than new governments in Italy and Greece is a new economic approach in Germany. Letting the ECB act as lender of last resort and pursuing German expansion and upward wage revision would be a much more effective and socially just approach than deflation and austerity in the periphery. It would not even cost Germany anything, would compensate in a timely manner for the slacking off of external export demand, and address the competitiveness problem constructively. The notion that Germany should bear the costs of a periphery condemned by its own wage restraint to basket-case status is economically senseless and a political nonstarter. Especially when a mutually profitable solution is available - core expansion - once the blinders of received wisdom are abandoned. If the new Italian and Greek governments' only raison d'etre is to force more deflation on their peoples their prospects are bleak.

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