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To: Rarebird who wrote (22267)	10/26/1998 8:58:00 AM
From: Ceedee	Read Replies (1) \| Respond to of 116796

New bull market on the way,a good comment... gold-eagle.com

To: Rarebird who wrote (22267)	10/26/1998 11:03:00 AM
From: Alex	Respond to of 116796

Neo-Keynesianism Returns to Germany I, Lafontaine. The launch of the single European currency is a momentous political event. But it may turn out to be less significant than what is about to happen in Germany: the return of neo-Keynsian economics. For the past 16 years, Germany has applied a mixture of monetarism at the level of the central bank and supply-side economics at federal government level. Germany has also managed to persuade its European partners to adopt this concoction as part of convergence towards economic and monetary union next year. Oskar Lafontaine, the new Social Democrat finance minister, comes with a promise to return to macroeconomic demand management. His determination and political power to implement the plan should not be underestimated. His closest adviser and de facto deputy at the finance ministry will be Heiner Flassbeck, Germany's best-known Keynsian economist and director of the Berlin-based Deutsches Institut für Wirtschaftsforschung. Treated as something of an outcaste by his colleagues for many years, Mr Flassbeck will now be in charge of macroeconomic policy, including exchange rate policy. He will be Germany's most influential representative on the international circuit. Both men have been vocal critics of German economic policy, in particular of the Bundesbank. Mr Lafontaine has warned about the dangers of deflation and has called for the central bank to be co-opted into the economic policy process. In a book, co-authored with his wife, Mr Lafontaine wrote: "Monetary policy must carry a bigger responsibility for the economic development of a country in light of the declining importance of inflation and the growing dangers of a slide into deflation, with all its damaging economic consequences."* Mr Flassbeck recently said that deflation had already arrived in Germany. He called on the Bundesbank to cut interest rates by a whole percentage point to stimulate economic demand. He thinks that today's central bankers are making the same mistakes as their predecessors in the early 1930s. An economy that does not rely on fiscal and monetary policy for demand management has no other option but to undertake cost cutting to stay competitive. The result is a contagious downward spiral of exchange rates, domestic prices, and global demand. It is the script for a depression. This radical change in German economic thinking will have profound implications for Emu. The Maastricht treaty, the legal and constitutional foundation of the single currency, is a shrine to conservative economic thinking. The primacy of price stability, the absolute independence of the central bank, and the prescription of fiscal austerity are more than just policy. They are constitutional law. Mr Lafontaine is a strong supporter of Emu itself, but he has been a fierce critic of its neo-classical economic and legal foundations. He believes that price stability should not be the exclusive strategic objective of a central bank. He supports central bank independence, but not of the extreme variety that the European Central Bank enjoys. He believes that central banks and governments must work together. He is a strong advocate of target zones that would link the exchange rates of the largest currencies, the euro, the dollar and the yen. All this seems certain to put the irresistible force of a new finance team on a collision course with the immovable object of the new European Central Bank. The ECB's president, Wim Duisenberg, and some of the national central bankers who sit on the ECB's governing board, have reputations as hard-line monetarists. A physicist by training, Mr Lafontaine has already given due consideration to engineering the collision. One way is to weaken the immovable object. The tool is the exchange rate. There is legal uncertainty about who is in charge of exchange policy. The Maastricht treaty puts ministers in charge, with the qualification that exchange-rate policy must not conflict with the central bank's price stability target. Mr Lafontaine's support for target zones aims to prevent the euro from overshooting against the dollar and thereby damaging export industries. Central bankers are sceptical about currency regimes, not least because they deprive them of a degree of freedom. It is more difficult to pursue a price stability target and an exchange rate target simultaneously, than to pursue one target alone. But as long as ministers agreed unanimously, it would be difficult for the central bank to oppose them. The legal grounds are too weak. But this still leaves plenty of scope for conflict over the issue. The first whiff of this conflict came last week, when Mr Lafontaine and Dominique Strauss-Kahn, the French economy minister, met at the Franco-German border town of Saarbrücken to discuss a strategy for exchange-rate target zones and policy co-operation. Speaking at about the same time in Berlin, Mr Duisenberg said the ECB would oppose a global currency regime. The conflicting messages from central bankers and politicians are a sign of how unco-ordinated policy is at present. The ECB can hardly be expected to co-ordinate with 11 governments - or even perhaps 15 - so it is up to governments to organise themselves and form an effective counterpart to the ECB. In his book Mr Lafontaine supported the most extreme form that such a counterpart could take - the formation of a European economic government. This would involve a far greater degree of co-operation on taxes and spending. Beyond this, Mr Lafontaine also wants to draw the employers and the trade unions into the process of macro-economic policy co-ordination. The Maastricht treaty does not have any provisions for European economic government. Its main focus is on monetary policy, leaving fiscal policy firmly in the hands of national governments. To create a single voice on fiscal policy, voluntary co-operation between governments is the only available option in the short run. In the long run, a revision of the treaty to reduce its monetarist fervour and add a fiscal policy element might be the preferred solution. The Financial Times, Oct. 26, 1998