BERLIN – Germany’s stance toward Europe has become one of rejection and disengagement. Its policymakers deny the eurozone’s crisis-ridden countries a more active fiscal policy; refuse to support a European investment agenda to generate demand and growth; have declared a fiscal surplus, rather than faster potential growth, as their primary domestic goal; and have begun turning against the European Central Bank (ECB) in the struggle against deflation and a credit crunch. On all four counts, Germany is wrong.
To be sure, Germany is justified in rejecting narrow-minded calls by France and Italy for unconditional fiscal expansion. After all, fiscal stimulus can work only if it supports private investment and is accompanied by much more ambitious structural reforms – the kind of reforms that France and Italy are currently resisting.
But Germany has all of the leverage it needs to implement the stability-oriented reforms that it wants for Europe. For starters, Germany, together with the European Commission, can compel France to pursue deeper reforms in exchange for more time to consolidate its deficit.
Germany cannot, however, indulge its obsession with supply-side reforms without also pursuing growth-enhancing policies. As Germany knows from its own experience in the early 2000s, the benefits of supply-side reforms – namely, improved competitiveness and higher long-term growth rates – take a long time to emerge.