Press release: German contraction shows European Central Bank must act

Commenting on Germany's shock 0.2% economic contraction, Research Director of the Adam Smith Institute, Sam Bowman, said: "Germany's contraction might be a wake-up call to the European Central Bank (ECB) that it is driving Europe's economies into the ground. If it forces the ECB to finally ease policy, it may prove to be a blessing in disguise.

"Tight money is almost entirely to blame for the Eurozone's current problems: as the rest of the world has slowly recovered from the Great Recession with relatively accommodative monetary policy, Europe has sunk back into deep recession.

"Inflation in the Eurozone has been dangerously low over the past six years. The ECB has a mandate to target 2% inflation, which it has consistently failed to reach in recent years. The result has been a 'musical chairs' problem where there is not enough money circulating in the Eurozone to match people's wage demands. The result has been unprecedentedly high unemployment in many Eurozone countries.

"Once, economists warned that Europe faced a Japan-style 'lost decade' of unemployment and economic stagnation. That now seems like wishful thinking: because the ECB has kept money so tight and so much wealth has been lost, the Eurozone is likely to be in extremely bad shape for many years to come.

"If the ECB was really willing to do 'whatever it takes' to reach its inflation target, including quantitative easing, it could bring the Eurozone back to growth. The Eurozone has needed easier money for years now; now that Germany does too, it may finally see it."

For further comments or to arrange an interview, contact Kate Andrews, Communications Manager, at kate@adamsmith.org / 07584 778207.

The Adam Smith Institute is an independent libertarian think tank based in London. It advocates classically liberal public policies to create a richer, freer world.