May 25, 2003


In Germany, deflation is drawing closer. The largest economy in Europe, Germany’s, is already technically in a recession, its second in three years, as economic output turned negative over the last two quarters. The government said Friday that prices rose just 0.7 percent in May from a year earlier – not far from an outright decline in prices.
Many analysts now say that at least a modest deflation is likely this year, with several months of falling prices. While the prospect of cheaper BMWs may sound appealing to some, it is actually a symptom of a serious problem: a lack of demand as Germans cling ever more tightly to their wallets. Will Germany turn into another Japan, where falling prices and subpar or nonexistent growth have caused a “lost decade” for the second-largest economy in the world?

Though there’s a temptation to engage in schadenfreude at the prospect of economic misfortunes for one of the Axis of Weasels, in truth this is bad news. Japan is already in trouble. Now Germany’s heading that way. The United States can’t hold off a global recession, or worse, on its own. I’m not an econoblogger, but this worries me. I also suspect that Germany’s problem has a lot to do with excessive rigidity in regulation and employment rules, and that the reaction to this problem will tend to be in directions that make that worse, rather than better.

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