Following a deeply disappointing second quarter performance, the leading economy in Europe faces rough times ahead. Confronted with mounting odds, it still resists pressure to invigorate domestic demand. True enough, its industry has specialized in third country outlets. Yet, enhanced home expenditure would help to redress other European economies thus offering better chances for selling its goods. It would amount to a win-win move.
Yet Berlin refrains from taking such a sensible step fearing to lose a firm grip on its neighbours. It has put to good use the crisis for imposing on others fiscal neutrality as the rule of conduct. Thus, it views expansionary policies as potentially watering down its leverage for enforcing such a tight discipline.
Yet, only a combined and coordinated fiscal push can deliver growth. The ECB´s forceful efforts for delivering a liquidity glut to the economy have so far failed to redress the situation. Draghi has been voicing concern ever since he rang the alarm bell in Jackson Hole. Monetary policy cannot cope with the task of fostering recovery so long as overall expenditure remains subdued. Fiscal policy must play a key role in achieving this goal. Otherwise, the Eurozone might plunge into another downwards trend.
Europe has a rather narrow window for securing growth. The interest hike on the other side of the Atlantic will likely push up medium and long-term credit costs, exerting a depressive effect on performance. It can only count on a couple of quarters for anchoring recovery. No time should be lost in doing so. Failure to act now could inflict a heavy toll later on.