In recent Newsweek article, German finance
minister Peer Steinbrück criticized the recent stimulus measures
proposed by UK Prime Minister Gordon Brown, remarking, “The
switch from decades of supply-side politics all the way to a
crass Keynesianism is breathtaking.”
Brown wasn’t pleased. But no one took the barb more personally
than the self-appointed champion of Keynesianism, the Nobel
laureate Paul Krugman. He mocked German Chancellor Angela Merkel,
who has steadfastly refused extra stimulus measures proposed by
the EU, as “Frau Nein.” He
derided German leadership as “conservative politicians,
clinging to an out-of-date ideology,” a wishful characterization
since Steinbrück is a card-carry member of the Social Democratic
Party.
Most of the EU shares Krugman’s disdain, even though it seems
that the Germans are being quite Keynesian. Merkel agreed to the
EU’s 200 billion-euro stimulus package and passed a 32
billion-euro stimulus in Germany, with plans to consider another
30 billion plan in January, after Obama takes office.
The sticking point is that Germany, which ran a balanced budget
last year and is in surplus this year, has refused further
measures, especially tax cuts modeled after the UK’s 2.5% cut of
the value added tax (VAT). Steinbrück panned the British VAT cut,
saying the only effect would be to raise Britain’s debt to “a
level that will take a whole generation to work off.”
THE REASON GERMANY has parted ways with the rest of the EU and
the U.S. on this issue is that Germany has practiced
sensible fiscal policies over the past few years. Steinbrück
characterized Europe’s attitude as “let’s get the Germans to pay
because they can,” and he’s almost certainly right.
The credit crunch would not have posed an insurmountable obstacle
in Germany alone, where consumers and companies have savings and
cash on hand. But since the Germans rely so heavily on exports,
especially those of high-end cars, the lack of demand in other
countries affected them as well.
With that in mind, Merkel and Steinbrück approved the 32
billion-euro stimulus package. But they draw the line at
incurring excessive debt to placate their less responsible
neighbors.
In the UK and elsewhere, the crisis came after years of housing
bubbles and budget overruns. For the UK, deficit spending has a
different meaning than it does in Germany. The UK’s debt is set
to double next year, and is
trading at a higher price than McDonald’s debt in the credit
default swap market — meaning the market thinks it is riskier.
Why should Germany also sacrifice its hard-won fiscal stability?
Krugman made the point that since the EU is highly integrated, an
uncoordinated fiscal stimulus would be far less effective than a
coordinated continent-wide measure. Any country unilaterally
pursuing deficit spending would bankrupt itself when about 40%
(the amount of GDP that EU countries spend on imports) of the
spending benefited other countries.
For the rest of the EU, desperate for massive stimulus, the
Germans’ obstinacy reeks of nationalism. They must either abandon
coordinated stimulus entirely or give Germany a free ride.
Nationalistic or not, it’s a reasonable choice for Germany.
Jean-Claude Trichet, the president of the European Central Bank,
warned the rest of the EU that fiscal indiscipline would not be
tolerated for the sake of deficit spending.
Furthermore, the Financial Times
reported, Trichet argued “that the European Union’s
‘stability and growth pact,’ which sets rules on public deficits
and debt, offered flexibility to countries with stronger
finances.…Mr. Trichet’s comments on the need for fiscal
discipline could offer some comfort to Berlin…”
So the rest of Europe, suffering because of its lack of prudence
and restraint, lashes out at Merkel for maintaining hers.
Apparently Germany is not free to maintain sanity when the rest
of the EU, panicked, resorts to Keynesianism.
BARACK OBAMA AND incoming Treasury Secretary Timothy Geithner
should take note. Massive deficit spending is the province of
desperate European leaders, and not something to be countenanced
merely because Paul Krugman and Gordon Brown demand it.
The U.S. stumbled into the crisis in similar fiscal condition to
the UK’s. Now Obama is weighing a public spending plan that would
add $1 trillion to the deficit, in a reprise of FDR’s New Deal.
Profligate spending didn’t work in the '30s, it led to crippling
inflation in the '60s, and it should not be on the table
today.
The lesson from Merkel and Steinbrück is clear: with a little
backbone Obama wouldn’t need to add $1 trillion to the deficit.
What are the odds he’ll listen?
