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BYU's Wade Jacoby Discusses Germany and Economic Misery in Europe

By Nick Solano '14  |  Contact Holly Foster 315-859-4068
Posted February 13, 2013
Tags Economics European Union Government International Affairs

Wade Jacoby, the Mary Lou Fulton Professor of Political Science at Brigham Young University, visited Hamilton recently to lecture on Germany and the continued economic woes in Europe.  As Americans, we often view the Great Recession through the lens of our own experiences; however, Europe has found itself in an even more precarious position.  With inordinately high unemployment rates and debt-to-GDP ratios, many countries in the Eurozone are on the precipice of financial disaster.  Germany, however, has weathered the crisis fairly well.  As a result, European countries have turned to German Chancellor Angela Merkel for leadership, guidance and economic support.

 

Member countries of the European Monetary Union (EMU) are bound to a universal currency and certain economic mandates.  A central bank – endowed with maintaining price stability through low inflation – controls monetary policy for the entire Eurozone.  During economic crises, countries typically use expansionary monetary policy to combat recessions.  This entails increasing the money supply, lowering interest rates and accepting inflation for lowered unemployment.  Since the European Central Bank’s (ECB) top priority is keeping inflation low, it is unable to use effective monetary policy during times of recession.  Jacoby emphasized how the ECB has limited its effectiveness, saying, “The ECB has brought a knife to a gun fight; it can do one thing, clamp down on the economy.”

 

Jacoby also discussed how Germany harbors unrealistic expectations of reform based on its own experiences.  During the 1990s, Germany was considered to be “the sick man of Europe.”  While other economies were booming, Germany underwent financially painful reforms such as revamping unemployment benefits, establishing job-training programs and restructuring the labor market.  These initiatives were largely financed through deficit spending.  Now, Germany expects other European countries to apply these same techniques while simultaneously practicing austerity.  While Germany enacted these changes in a prosperous Europe, most countries now find themselves in dire economic straits.  This environment is not conducive to comprehensive reforms that create undue fiscal stress.

 

According to Jacoby, Germany – now the strongman of Europe – cannot apply its own lessons to a diverse set of countries in a completely different economic environment.  And by stressing austerity, Germany has largely missed the fundamental causes of European struggle: imbalances in the real economy and the financial sector.  Jacoby ended his talk by claiming that European leaders could not fix either of these concerns, so they chose to address state overspending.  However, this did not cause the economic crisis, and it will not resolve the lingering problem.

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