The economic policy debate in Europe – or rather in the euro area – seems deadlocked. We would like higher growth of domestic demand and incomes, but monetary policy doesn’t work anymore; fiscal policy is not available because of political constraints; and structural reform resembles the mythical phoenix, unable to rise from the ashes until someone gives it concrete content.

In this policy brief, I argue that the euro area suffers from a special disease that sets it apart from the US and the other advanced economies because its economic policies are constrained by the massive excess savings of its anchor economy, Germany. This is in turn the result of a single-minded export orientation of the economy for over two decades that, through the common currency, constrains growth in domestic demand in the rest of the area, and notably in the less competitive economies. Therefore, there is no way out of the present predicament of low growth and low inflation in the euro area unless Germany reduces its excess savings and raises domestic demand and incomes, clearing the way for other euro participants to follow suit. A thoroughfare to get there is offered by opening the services sector to integration and competition in the internal market and accepting the long-delayed consolidation of the network services industry in Germany and the entire euro area. My argument is based on four exhibits of evidence.

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