‘The German Illusion’ Calls for a Major Change in Berlin’s Economic Policy

Written by | Monday, October 20th, 2014

A new book entitled ‘The German Illusion’ argues that the country is at risk of economic hubris, suggesting that Germany should abandon the notion that it is invulnerable and that EU membership makes it a victim. The book’s author and a top economist, Marcel Fratzscher, who is also president of the prestigious German Economic Research Institute (DIW), makes a strong argument for a change in Berlin’s economic policy. Fratzscher’s book posits that his country sees itself as a “superstar”, something he denounces as an illusion – his arguments goes on suggesting that if Germany continues to perceive itself as a “superstar”, it would not have an economic future outside the EU.

The 43-year-old German economist, who has also worked for the European Central Bank and the World Bank, criticizes Germany for being “obsessed with structural reforms”. The book has made headlines in Germany and prompted the country’s economy minister Sigmar Gabriel to appoint Fratzscher to lead an expert group tasked with devising an outline for an investment agenda by early next year. Yet, this does not mean that Germany is likely to change its economic course any time soon – “More debt in Germany does not create growth in Italy, France, Spain or Greece,” asserted Gabriel, thus making it clear that he supports finance minister Wolfgang Schaeuble’s 2015 zero debt target.

But ‘The German Illusion’ opposes the government long-term policy by arguing that this path will be “fatal for the German economy” because “debts are not bad” if they enable good investments. Despite Germany’s three major economic achievements, such as a stable budget, record-high exports and a reduction in unemployment, Fratzscher points to several significant problems in the economy that Germans do not see really mainly because other countries in the eurozone face even bigger challenges. Ultimately, to solve these problems, he calls for a “grand bargain” of a successful monetary policy linked to structural reforms and a responsible fiscal policy.

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