Deficit of Courage - The American Spectator | USA News and Politics
Deficit of Courage

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 He derided German leadership as “conservative politicians, clinging to an out-of-date ideology,” a wishful characterization since Steinbrück is a card-carry member of the Social Democratic Party.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?

Sign up to receive our latest updates! Register

By submitting this form, you are consenting to receive marketing emails from: The American Spectator, 122 S Royal Street, Alexandria, VA, 22314, You can revoke your consent to receive emails at any time by using the SafeUnsubscribe® link, found at the bottom of every email. Emails are serviced by Constant Contact

Be a Free Market Loving Patriot. Subscribe Today!