But what does this deficit reflect? Modigliani partly blamed Europe’s modest growth and pointed in particular towards Germany and its high unemployment. "Germany’s expansion has been much too slow and not sufficient to absorb employment," Modigliani stated. Historically, as Europe was growing faster than the United States, the exchange of the trade zones would have been balanced.
Exactly 30 years after meeting Modigliani in 1987 at his house in Belmont, recent trends in Europe demonstrate a much slower growth and enormous levels of unemployment, with Greece topping the list with 22.5 percent unemployment, followed by Spain at 17.8 percent. At present, there’s nothing on the horizon that looks like it will help bring these numbers down.
"Germany is the key to the whole story," Modigliani explained, "because none of the remaining countries in Europe can expand alone, due to the fact that if they tried, they would run immediately into a balance of payment problems." Only strict coordination would give successful conditions for the simultaneous expansion of Europe. The only problem according to Modigliani: The Germans are afraid of expansion. "What I think they ought to understand is that however big the risk of expansion may be, the risk of not expanding is far greater."
If the world’s a chess game, what’s your first move?
Even with philosophical questions, such as the first move on a chess board, Modigliani pointed back to the necessity of leading Europe into expansion. He still might today. Europe is seriously falling behind in the world economy. The united trade zone still plays a key figure, and Modigliani’s ideas could provide useful guidelines. Back in 1987, he already knew that Europe needed investment. "It especially needs to stimulate the economy in a form that encourages the creation of more labor places," he said.
An Italian by birth, Modigliani was very concerned about the future role of Europe in the world economy and consistently suggested "linked models" to improve international relations. If foreign trade picked up - for example in Germany - then the demand for US goods would increase, and the central bank, as well as the government, would feel pressure because they need more resources to feed the export industry. And the only way they could do it is by increasing taxes and by increasing expenditure. According to Modigliani, this in return would decrease the trade deficit.
What determines the extent of our savings?
Due to his excellent (if somewhat unorthodox) theoretical and empirical approaches, Modigliani was often compared to the great physician Enrico Fermi, who was known for his rare talent to master multiple disciplines in the natural sciences. The legacy Modigliani left is vast, but two of his fields of work are of particular note.