Eurozone Watch

The general perception about the relative merits of the US economy on the one hand and the continental European economies on the other hand is simple: The US is a very dynamic economy which has been growing briskly over the past decade while Europe is sclerotic and always lagging behind. While markets in the US are free to allow for a swift process of innovation and growth, overregulation and a large government sector in Europe keeps growth down.

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Last Thursday, the leading German economic research institutes have published their semi-annual diagnosis of the state of the German economy. Similarly to Michael Burda's post on RGE Monitor, they warn that the Grand Coalition must not fall into a "reform pause". Just like Michael Burda, they credit part of the German turnaround to the Agenda 2010 reforms (never mind that they did not see any significant growth impact from them when they were passed – see this comment by Thomas Fricke at FT Deutschland's website).

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Ten days ago still, the German Finance Minister Peer Steinbrück stood in strong opposition against several of his Eurozone partners: during a meeting of the Eurogroup, some countries had raised strong concerns over the appreciation of the Euro, backed by their industry. The German government took a relaxed position on this matter,  arguing both that the German industry had no export problems due to their succesful efforts to improve productivity, and that the strong Euro also had economic advantages, notably due to the low prices this brought about for imports, e.g. energy.

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Today, the German tabloid "Bild" ran a story that a number of top German employer federations have written a joint memorandum warning the government of rolling back even parts of the "Agenda 2010" reforms enacted by the Schröder government. According to them, the recent upswing in German can at least partly be credited to these reforms, much as Michael Burda has argued. Any change would thus endanger the recovery.

We have already written a post on Monday in which we question this wisdom, stating that such an interpretation of the origins of the German turnaround is not covered by developments into the German labour market.

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With politicians from right and left in Germany discussing a possible new extension of the duration of unemployment benefits for the elderly, a new debate in Germany has started concerning the reasons of the recent upswing. The central question of the argument is: What role did the labour market reforms of the Schröder government play for the "Teutonic turnaround" as Michael Burda calls the recent development in his first post for the new Europe EconoMonitor blog at the RGE website?

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Starting from today, we will have a cooperation with RGE Monitor, the financial information website of Nouriel Roubini. In future, most of our posts on Eurozone Watch will be co-posted in Nouriel's new Europe EconoMonitor Blog, where we will be part of a group of 25 economists commenting on European economic development. We are very excited to be part of this endeavour and are looking forward to many challenging debates on the blog.

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For those who were hoping that the euro economy would get through the global credit crisis unscarred, the past week has brought bad news: Survey data in Europe instead point to a significant dent in growth. Now the interesting question is whether the economy will recover quickly or whether the consequences of the credit crisis will linger on.

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