Suppose you are Angela Merkel, Chancellor of Germany. You look at your country and see serious long-term demographic issues, which will ultimately create financing problems for your welfare state. Your country’s culture emphasizes thrift, in any event. Under these circumstances, it makes both economic and political sense to keep public spending and aggregate demand under strict control.
Suppose, instead, you are Angela Merkel, de facto leader of Europe. You see stagnation and double-digit unemployment in most of the continent. In places like Spain and Greece, the unemployment rate is over 20 percent, with little hope of substantial improvement on the horizon. One of the obvious ways of dealing with these problem is to take actions to increase demand in Germany.
Which course do you take? You are responsible to the voters of Germany, but not Europe. What do you think?