What can save the EU?

Henry Farrell has a long and interesting article about the future of the EU in the current issue of Democracy.

There are some very good bits like this one:

"EMU’s current rules are the worst of both worlds. They are sufficiently constraining to make it difficult to respond properly to crisis situations, while not constraining enough to prevent crises from happening in the first place."

To that point, I can only say Amen!

But, there are also some weird bits, like this one:

If European economies are compelled to impose austerity, they cannot grow through increased domestic spending. Instead, they will have to look to increased exports, copying Germany’s path to prosperity. Unfortunately, the world economy cannot accommodate 26 little Germanys. The current imbalance between the United States–as a net importer and borrower–and exporters such as China already poses a grave risk to international economic stability. If Europe dampens domestic demand and simultaneously looks to increase exports substantially, it will make this imbalance much worse.

People, has it come to the point where it is believed that ONLY government spending stimulates the economy? If governments retrench, is increased overall domestic spending really rendered impossible? Have Alesina & Ardagna labored completely, 100% in vain?

There is also a dubious bait and switch quality to the argument where we go from more "little Germanys" increasing their exports to another China. Does Germany require double digit growth rates for domestic stability? Is Germany a serial currency manipulator? Is Germany's trade surplus anywhere near as large as China's? Wouldn't a large amount of any increased exports by EU countries go to other EU countries?

I also have grave misgivings about the way exports are viewed here and by many others. They are analyzed as if exports can rise and nothing else will change. To my reading, Henry is implying that the consequence of increased EU exports will be an equivalent set of increases in trade deficits for the rest of the world. But the world economy is a dynamic, general equilibrium process, not a static, partial equilibrium one. Won't increased exports in Germany raise earnings and demand there? After all, German savings rates are well below 100%. Won't increased German demand increase Germany's imports from the rest of the world?

To put it in a nutshell, exporting is NOT A ZERO SUM GAME!