Europe at a Precipice

Tom Bonan, Opinion Editor

It seems that for most of the world, the worst of the financial crisis that began in 2008 is over. Financial markets in the United States and Britain have recovered to their pre-recession levels, and it seems that a major default of Greek, Irish, or Spanish debt is no longer an imminent threat.

The world still has a lot of ground to cover over the next few years. Germany–the shining beacon of hope for the European Union (EU)–is on track to have a balanced budget for the fiscal year 2015, a first for the country in decades. The one caveat, an economic slowdown and German reluctance to increase government spending, is threatening to let the county dip the EU into its third recession in six years.

Throughout the debt crisis that swept countries like Spain and Greece, Germany remained overwhelmingly solvent due to years of meticulous budgeting and restrained spending. The country maintained relatively stable rates of growth throughout most of the 2000s due to predictable output and overall reliability.

Recently, however, Germany’s growth has declined as a result of the sustained weakness of the EU and the lack of domestic demand.

One of the largest reasons for their governmental lassitude is the fear of inflation. The economically disastrous decade that the Weimar Republic presided over has etched an indelible fear into the cultural memory of the German people, leaving many wary of high debt and any subsequent increase in the money supply that might usher in inflation. This inveterate attitude led to fear of a total collapse of the EU as the country was restrained towards taking on the budgetary problems of other nations in Europe.

Both in Germany and on a global scale, inflationary fears are drastically exaggerated. Of the countries that have central banks that target inflation, many are below target by significant margins. In the United States, interest rates have hovered around 0 percent  for the better part of the last decade, partly due to the Federal Reserve System’s response to a lack of any significant inflation.

The greatest concern for the global economy should be deflation; if price levels are decreasing, then consumers and investors have an incentive to hold onto their money, which would cripple markets that desperately need consumption.

Germany is subsequently in a very unusual position. The country has the economic resources of many others at their disposal, meaning they have a dramatic hold on the economic future of Europe. Slipping into deflation may result in an infamous “lost decade” like the one that Japan is still recovering from.

The most sensible course is a short-term increase in infrastructure spending and government debt, which could provide the relief that Germany and much of Europe needs. Angela Merkel’s conservative Christian Democrats have presided over the most severe crisis in recent memory, but a lack of action in the coming year would herald something much more severe and enduring.

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