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The best way for Germany to help Europe is to cut taxes

There's one thing everyone thinks they know about the seemingly endless problems in the eurozone: It's about who will make sacrifices, the thrifty Germans or the heavily indebted south.

Except this is totally wrong, as economist Robert Waldmann explains in a brilliant paragraph that comes in the midst of an effort to adjudicate a debate between two other writers. What Europe needs from Germany is not sacrifice, but self-indulgence — lower taxes, higher wages, and more consumption:

I would say that the Eurozone has two huge problems. One is that Greece has debts it can't and won't repay. The other is that aggregate demand is too low. One perfectly fine solution to the aggregate demand problem would be for German taxpayers to grit their teeth and accept a tax cut. This would stimulate German demand including demand for imports. If Germans were feeling incredibly generous, they might also consider accepting an increase in wages. What the Euroblock needs most is higher aggregate demand -- self indulgence, the illusion of wealth of those who think government bonds are net wealth and all that. What we need is less German self sacrifice not more.

The case for a German tax cut is even stronger when you consider that the country is currently paying an interest rate of less than 0.7 percent on its 10-year bonds. When you take inflation into account, it's actually cheaper for Germany to pay for government spending with debt than with taxes.

Germany levies a 19 percent value-added tax (basically a sales tax) on almost all consumer good purchases. A nice big cut in that rate — financed entirely with borrowing rather than spending cuts — would make German people better off, with benefits especially flowing to lower-income Germans, students, and retirees. But it would also speed up economic recovery throughout the continent. It is a win-win option that would by no means solve all of Europe's problems, but would ameliorate most of them.

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