Germany Needs Structural Reforms

A blog about business and economics.
May 11 2012 10:11 AM

Germany Needs Structural Reforms

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BERLIN, GERMANY - DECEMBER 14: Bundesbank head Jens Weidmann attends a commemorative event at the Finance Ministry marking 10 years since the introduction of the Euro in Germany on December 14, 2011 in Berlin, Germany.

Photo by Sean Gallup/Getty Images

Sensible people around the world would like to see the European Central Bank provide a bit more demand to give the governments of Spain and Italy a fighting chance of pairing fiscal consolidation with some economic growth but the head of the Bundesbank is still droning about the evils of inflation. So here's an idea that might blow Jens Weidmann's mind: Maybe Germany should undertake some structural reforms!

After all, it's not as if "inflation" and "real output growth" exist in two hermetically sealed universes. An increase in demand becomes inflationary when the economy lacks the capacity to meet demand growth with more real output. And despite the current smug state of German politics, there's plenty of evidence that the Germans could be reforming to build their capacity for growth. As I've noted before, Germany's employment:population ratio is much lower than America's notwithstanding the fact that they're allegedly in a boom and we're in a recession. It's the odd laziness of the German population that makes their economy so brittle and inflation-prone that they can't think of a better way to contain prices than to stifle economy-wide demand. But if Germans could induce themselves to act more like diligent Americans (or Swedes) this problem would go away, and Europe could have more demand without Germany having more inflation.

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My understanding of the way this genre works is that I'm supposed to talk about how Germany needs to make "tough choices" and/or "painful reforms" but I actually have no idea what would be so painful about the reforms the country needs.

In Germany, for example, it's illegal for a baker to keep his shop open for seven hours on a Sunday. So, okay, quirky blues laws. Except that actually if you're not running a bakery you basically can't open at all. I once tried to buy some socks in Berlin on a Sunday. Out of luck. This not only stifles employment and output directly, but it has the indirect consequence of making life unreasonably difficult for working mothers since you've basically lopped 50 percent of viable errand-running time off the list. If married women were more able to participate in paid labor markets, that would not only directly boost growth but also create additional work opportunities in household support occupations like child care, housecleaning, and food which would increase Germany's capacity to absord immigrant workers from southern European countries. And again the point here isn't that a reformed Germany would need to reach unthinkable levels of Stakhanovite work. Americans do it. Nordics do it. It can be done.

Now if Germany doesn't want to reform, it doesn't have to. But it's just a reminder that it's simply not the case that there are no alternatives to inflation and demand-squelching. German labor is very productive on a per hour basis, but the economy's "full capacity" quantity of hours worked is very low.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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