Germany Resists Europe’s Pleas to Spend More

The NYT outlines the German view of austerity and growth here.

25 replies on “Germany Resists Europe’s Pleas to Spend More”

Its hard to know whether to laugh or cry at this bilge. Why have governments borrowed so much? Not a glimmer of a mention. That’s an E.

Keynes again. That was a million years ago! No WWII. No Chindia. No FIRE. No CDS, CDO, MBS, etc., etc. Its surreal. Another E.

And this tripe, “The central argument is that less spending by government encourages business to invest more and consumers to spend more, because the expect to pay lower taxes” That’s an NG, big time! Mentions Denmark in 1980s as an exemplar. That’s a half a million years ago. E again.

Truth or the news?


This is a superficial and completely irrelevant piece by NYT. Germany also has a major public borrowing problem. The crisis in the euro stems from the skewed nature of the German economy relative to the others, not the lack of public spending. With unemployment falling in Germany – and with major skilled workforce shortfalls in the sectors keeping the “export machine” going – but rising in every other country, including France, even the most myopic leaders must by now accept that something is radicaly wrong with the European policy mix.

In fact, with the recent reports with regard to a Franco-German growth initiative, it seems that this is happening. Notable also are the indications of a much greater flexibility in the German position (and even that of the UK in relation to boosting the IMF) cf.

I haven’t read the NYT for a while. I’m not sure whether this article or the one about Quinn on another IR thread today takes the prize for ‘most obvious example of journalism knowing zilch about the subject but using Google and reading blogs to hash up a story the Editor told me to write.’ They are both dire.

I’m sure I’ve read some good stuff in the NYT in the past. I will put it down to a bad hair day.

Actually, I will ring the Editor tomorrow (is it still Turner Catledge 🙂
– crazy name, crazy guy) and let him/her know that people in Ireland are laughing at their paper. That will really pi55 them off.

Why wouldn’t Germany resist spending money? This crisis has been a bonanza payoff for Germany, and will continue to be for a long as the crisis lasts.

Over the last five years, the jobs, wealth, and political power of a continent has flowed, nay rushed into Germany. Germany has sucked in the industry, money, and independence of other nations like a fire-storm sucks in air. And with each passing month German rhetoric grows hotter, their contempt keener, and their will to pauperise others ever stronger.

The financial crisis is the flame, the euro the fuel, and the ECB the forge that is melting down the once bright EU into puddles of pig iron, to be wrought as the Chancellor and Bundesbank see fit. Nations like Ireland are to be mere slag, absorbing the waste of this process that the final metal might be purer, later to be cast aside as waste by-product. The metal that remains will be German steel, and I don’t expect it to be cast into ploughshares.

Ireland and the rest of the periphery nations must suffer austerity so that the German banks can be saved, so that German jobs can be created, so that German inflation can be kept low, and German competitiveness preserved. Germany is kept warm by the all this, so why would she remain anything but oblivious to the pleas of nations she casts to the flame.

Given Germany’s recovery after the war and the 20 year recovery after the re-union between East and West Germany and the fact that they’ve done it with hard currency whenever they can, one wonders why the NYT is so confident that the Germans have it wrong and everyone else has it right.

@Hugh Sheehy

Given Germany’s recovery after the war and the 20 year recovery after the re-union between East and West Germany and the fact that they’ve done it with hard currency whenever they can, one wonders why the NYT is so confident that the Germans have it wrong and everyone else has it right.

The argument is about who exactly the Merkelists have “it” right for, since they (along with the financial sector) now exercise an apparent stranglehold on economic and monetary policy in the Eurozone.

British Imperialism was obviously good for Britain but of less obvious benefit to its colonies (like all Imperialism). More pertinently for the NYT article Empires have their own cost and a nasty habit of collapsing once the territories have been exhausted and grow restive.

Germany is very heavily indebted by German standards and over indebted by normal standards. The NYT and many other generalist newspapers in the US do not have a good handle on foreign affairs. The WSJ and Reuters which is Canadian owned but with major operations in the US do a good job on foreign affairs. Murdoch took over WSJ a few years ago but it has not become the News of the World yet. Most Germans believe that their gov’t is lacking the moral fibre to get the debt to GDP ratio below 50% (now over 80%) where they would feel confident that they could take a major hit from collapsing exports to Asia. They are always conscious of the need for the Gov’t to have a buffer to alleviate conditions in a serious recession. If you live by exports you can die by exports which they see happening if China has a major recession with knock on effects around the world. In Ireland our Gov’t believes in miracles through the intercession of the BVM, St. Patrick and others including the ECB and IMF. Merkel is enjoying the lowest unemployment rate in twenty years which augurs well for her re-election. After the election the German Gov’t is likely to reduce its indebtedness at which time the rest of Europe will have reason to complain.

I would expect there are models showing Europe in recession, falling imports from China, China in recession falling EU exports to China, the US in recession further exacerbating the problem.

You might find it hard to believe but there are Americans who are sure Japan got it right over the past twenty years since their property bubble bust. Japan with Debt to GDP over 200% and unemployment in 6% range got it right. There is a signal there that QE4 and up is on the way in the USA. Do not expect QE to run amok in the EZ.

Those who find fault but never favour in respect of Germany ignore the fact that Europe would be poorer now absent the success of its companies in emerging markets.

The trade surplus is highest ex-Europe and while the export similarity ratio of leading OECD countries and for example China is currently low, that will change in the next 10-20 years with direct competition in home markets for the big MNCs of the OECD.

Four decades ago, Japanese cars were dismissed in Ireland as cheap ‘tincans.’

In the age of globalisation, Europe will need to have successful world class companies.

The top 50 European corporations by sales include 15 German and 11 French but just 4 Italian firms.

It’s soundbite economics to see salvation in rising consumption in Germany.

It would help of course but absent significant reform in countries like Italy, which stagnated during boom years, the impact would be hard to detect.


Germany has no “Empire”, and you seem to be arguing for German self sacrifice – to make themselves poorer to make others richer – rather than any rational policy.

In any case, as they may have shown us all, the rational policy may be the hard currency route. Take your lumps when you need to, build businesses, be prudent, don’t screw up your money. Taking economic policy advice for Germany based on what Italy, Spain, France and the US would like might not be a good plan.

@ Michael Hennigan

“Those who find fault but never favour in respect of Germany ignore the fact that Europe would be poorer now absent the success of its companies in emerging markets”.

This is the standard line trotted out by German politicians of all hues and Schaeuble in particular. The problem with it is the fact that it fails to define “Europe” and the European beneficiaries that are no longer “poorer”. They certainly do not include most of the citizens of the EU outside the core and, indeed, even withing Germany. If “Europe” is to be seen as the beneficiary, then this is an argument for the very transfer union that the same politicians find totally unacceptable.

The points that you make with regard to what countries other than Germany need to do are, of course, entirely valid. However, the issue of who is mainly at fault, at this stage, is largely irrelevant. The fact of the matter is that the added bonus in terms of market access that the euro has provided has rendered the situation untenable.

I agree that added spending in Germany is not the answer. Liberalisation of the German domestic market is, however, a considerable part of it. The irony is that which I have pointed out before; other major economies are shooting themselves in the foot by endeavouring to play Germany at the game of administrative protectionism without having sufficiently strong industrial sectors to pay for it. (A current example is the decision by a Paris commercial court to force hyper-market Castorama to close on Sundays).

However, there is some light on the horizon. The new six-pack includes a Regulation on macro-economic imbalances which was approved by the European Parliament only subject to the following statement by the Commission.

Statement of the Commission

“The Commission welcomes the adoption of the Regulation on the prevention and the correction of macroeconomic imbalances. The Regulation recognises that the nature, importance and urgency of the policy challenges may differ significantly depending on the Member States concerned, and that given vulnerabilities and the magnitude of the adjustment required, the need for policy action is particularly pressing in Member States showing persistently large current-account deficits and competitiveness losses. It also recognises that in Member States that accumulate large current account surpluses, policies should aim to identify and implement the measures that help strengthening their domestic demand and growth potential. In implementing the Regulation, the Commission is fully committed to respect this approach and will ensure that macroeconomic surveillance covers countries with current account deficits and surpluses with appropriate differentiation as regards the urgency of policy responses and the type of corrective actions required”.

One may live in hope! As the Governor of the Bank of England remarked in a speech some years ago, all the onus for adjustment rests, de facto, with the debtor. Two considerations will force change on Germany; (i) internal political dissatisfaction with the uneven sharing out of the cake and (ii) realisation that the euro, and probably the EU with it, will otherwise collapse.

Merkel, when she was in Spain some months ago, invited Spanish workers to come to work in Germany. Can you imagine the political repercussions were she to repeat the same offer in France?

@Hugh Sheehy

Germany has no “Empire”, …

The argument about what exactly qualifies as economic imperialism is a bit abstruse for me but wikipedia’s take on the modern usage seems to make sense.

Some writers, such as Edward Said, use the term more broadly to describe any system of domination and subordination organized with an imperial center and a dominated periphery.

In other words imperialism does not require the use of physical force or occupation to enforce a subject relationship on a country. Its widely understood that modern Imperial powers have no emperor and the structures of political control are more informal but when the admittedly odious Berlusconi was replaced by a new viceroy Germany looked distinctly imperial to me.

@Hugh Sheehy

…and you seem to be arguing for German self sacrifice – to make themselves poorer to make others richer – rather than any rational policy.

A great deal of the strength of modern societies is due precisely to people making themselves poorer to make people who are less well than off than themselves less poor (progressive taxation and the welfare state) and it is a policy that is both rational and also moral. When Ireland received structural funds it was such a form of redistribution, and also enlightened national self interest as countries assumed that a collectively stronger and more equal EU would eventually bring benefits to all.

Modern Germany does the national self interest thing exceedingly well, but the enlightened bit is most definitely missing, possibly shot behind a shed full of Euro by Merkel as Weidmann held it down.

They don’t appear to be spending more. I see that German imports, reported today, fell…. does anyone know if domestic spending there is increasing or if there’s some kind of ‘buy German’ push on? Or are they just not spending full stop?
I’m surprised the government here hasn’t made more of the ‘buy Irish’ angle (i.e. a heavily backed, concerted campaign) as a means of helping Irish companies/jobs. I keep hearing a lot of hot air about the need to create jobs and help SME’s but it all seems pretty pathetic in practice. I support my local businesses and glad I do – the fresh veg and meat from local producers is better than anything I have picked up in Tesco lately.


“Why wouldn’t Germany resist spending money? This crisis has been a bonanza payoff for Germany, and will continue to be for a long as the crisis lasts.”

Well, no. They think they’re getting wealthy but they’re not, that’s the whole problem. I mean, what do they do with the money from their exports, do they spend it? No, they put it on their savings accounts, and their banks, awash in cash, lend to the very people to whom they just sold their goods (Ireland, Spain, Italy, Greece…).

I don’t see how these countries can repay their debts as long as this crisis lasts – when you have a current account deficit by definition your borrowings are increasing. So the germans think that all is well and that they actually got paid but they weren’t – it’ll just take them some time to realize that.

At some stage their banks are going to make massive losses on foreign loans (either through defaults or FX losses as periphery countries leaving the euro one by one), and these losses will have to be paid by the tax payer.

At various times in the past the Swiss Gov’t imposed a tax on bank deposits made by foreigners. I believe it was a one time levy of 3%, its main purpose was to slow appreciation of the Swiss Franc. If Germany was still on the Dmark they would have to implement a similar disincentive on foreign deposits.

It is all indicative of the level of fear leading to a flight to safety. It is not all that long ago when Germany’s indebtedness of over 80% debt to GDP would have been considered risky. Now it is a beacon of safety. Similarly with the flight to the US $.

The New York review blog is very good

Indeed, austerity economics has not worked in one single case in Europe in the last two years. When David Cameron’s government imposed a first round of harsh spending cuts in 2010, it utterly failed to revive the British economy as promised. To the contrary, it probably cut a budding recovery short. Unemployment and the deficit as a percent of GDP remained high. Some pro-Conservative observers I met at the time assured me that the Cameron team, led by George Osborne, the Chancellor of the Exchequer, was pragmatic and would reverse course on austerity if it wasn’t working. Yet when growth basically ground to a halt in late 2011, the Cameron team only doubled down, making further cuts. We need more of the same medicine, they told their citizens, a record number of whom are unemployed. Britian is a hair’s breadth away from outright recession only two years after its last one.

Sort of linked if you think of the bond vigilantes as austerity nymphomaniacs

@ All

This discussion ties into the debate launched by Professor Sinn on Target 2 balances. While re-launching any discussion on this topic is furthest from my mind, the commentary by Martin Wolf in today’s FT is pertinent. (His previous warm endorsement of the thesis defend by Sinn appears to have cooled!).

He agrees with the point made by Narg above (and, indeed, by Helmut Schmidt in his speech to which there is an embedded link in the article by Martin Wolf).

“I like the fact that the declaration is anti-mercantilist. It is important to undermine the widely-held view in Germany that large export surpluses are inherently a good thing. Jobs that depend on lending money to people who will not pay the money back are not jobs, but charitable activities”.

Why should this view persist? The explanation is almost certainly to be found in the historic economic development of Germany (summed up as a predominant role for heavy industry, machine tools, chemicals and pharmaceuticals, and motor-vehicles). And in the very concept of mercantilism in its various guises over the centuries, essentially a compact between the merchant classes, guilds (AKA trade unions) and government.

This compact exists in all modern European economies but has a particular significance in Germany. Its disadvantages for the bulk of the citizens of the country were largely hidden – until the introduction of the Hartz IV reforms – by a generous welfare system.

But if it is a “charitable activity” (e.g. losses by German investors post-Lehmans were the equivalent of a year’s exports which prompted one comment that the “Masters of the Universe” were driving around in donated Mercedes) why does it persist? One must assume that it makes individual sense for the large corporations involved – and their shareholders – in a manner which blinds them to the negative impact collectively.

It is also notable that neither Wolf, nor any other economic commentator as far as I can judge, attributes any significance to the the error of putting the cart (a single currency) before the horse (creation of a fully-integrated single market). This probably explains why so little attention is paid to correcting this error. Monti – as the author of a major report on the subject in 2010 – may be in a position to do something about it (although, as his support seems to be coming from two probably soon to be defunct Liberal parties, who happen to be the junior partner in governments in the UK and Germany), it is difficult to be optimistic.

On the debt brake issue, the German press (Bild) is reporting that Schaeuble wishes to get round the debt brake in the German constitution with regard to raising funds in the longer term which do not impact immediately on the budgetary arithmetic. William Buiter’s unremarked statement that he expects most banks in Europe to be state-owned may prove to be true more quickly than expected. Parking money with the ECB and a few of the core governments and other non-Euro Area safe havens is not a good augury.

In the meantime, the two loose cannons in charge of Europe’s destiny career round the deck wiping out all before them.

@ Hugh Sheehy

It depends on how you look at this. The key answer is in the second link.

“Rather it’s because labor market reforms put their [German] wage costs in line with the ECBs tight money policy after 2005. It was a successful “internal devaluation.”

The ECB was not doing any favours to Germany but it it was trying to emulate the Bundesbank – hence the remark by Trichet – in the early days of the currency and overdid it.

Schroeder, with his Agenda 2010 reforms, was not reacting to anything that the ECB was doing but to other imperatives, and he overdid it.

Among these imperatives was ending the role of Germany is the milch-cow, as he saw it, of the EU (a claim that was, and remains, entirely untrue) and underlining the capacity of a re-united Germany to act as a normal independent state i.e. just as badly as any other of the larger Member States. Such an approach, for example, saw him take a leading position in Norstream, the company that built the pipeline now bringing gas to Germany directly from Russia across the Baltic to the discomfit of the countries that were formerly Russian satellites, but within and outside the EU. It is difficult to imagine any of his predecessors doing such a thing. As regards his successor(s), who knows!

“The ECB was not doing any favours to Germany”
Thx for admitting this. Too many folks pretend the ECB is taking orders from Germany. That’s nonsense. In the early naughts, Germans were begging the ECB to lower rates, to boost our economy (which was lagging behind the bubble nations). No chance, because the central bankers were concerned about inflation in Spain. In hidsight, I have to say they were right. This would have overheated the already problematic boom in the South.

“just as badly as any other of the larger Member States”
And why not? Why should we be the sole fools for solidarity in a world we’re everybopdy only cares about his own interests? Schröder read the sign of the times right. That was a refreshing departure from Kohl, who just sat on his fat ass regarding reforms and made friends in Europe by handing out money like candy. ’nuff already.

And as for Hartz IV: Our welfare system still compares favorably with that of most other nations. The difference to the old system is, less bureaucratic overhead by applying the same rules to everybody (no cheating with alleged special needs anymore. like “broken down” refrigerators or something). Plus, lots of people misused unemployment benefits for early retirement, and where even encouraged by their companies to do so, since they the insurance paid a large part of their last salary for years. Neither welfare nor the Rentenkasse (social security) could afford that, so that had to be limited to one year, with ALG2 (the Hartz IV level) following up after that. That was virtually unavoidable and is one of the reforms that SHOULD have been done by that ole lamer Kohl. We have to thank Schroeder for having the courage to push this unpopular but necessary change through. It would have been good if he also had improved the situation for the lower incomes, like making the state pay for their healthcare insurance (and so, leaving those folks more of their income for consumption). That not only would have helped to fight unemployment for the lesser qualified, it also would have soothed the criticism by hhsi party base. Well, could, shoulda, woulda…maybe the next government in 2013 will finally act on this.

@ Gray, Germany

Many thanks for your reply. The view from Germany is invaluable.

I would be the first to concede that Germany has an excellent social welfare and health system and an efficiently run economy. But that does not mean that policy errors are not being made.

The difficulty is that Germany, for reasons of geography and history, cannot escape from the leadership role which its prowess in manufacturing gives it. A mistaken consensus exists that a large export surplus is, in itself, a good thing. It is, in fact, only a good thing for those benefiting from it which, unfortunately, does not include the generality of the population and it creates impossible problems in a monetary union (see below).

On the Hartz reforms, a recent report by your employment office shows that one quarter of those losing their jobs go directly into ALG 2. And the level of bureaucracy and the legal appeals that the reform has given rise to are, from my reading of the German press, legendary. If even Seehofer is raising questions about the inability of workers to provide themselves with pensions, and questioning the extension of the retirement age to 67, something must surely not be quite right!

But all of this is by the way. The fact of the matter that a situation in which Germany continues to build up surpluses within a monetary union without compensating mechanisms is both politically and economically untenable. The loss by France of her triple A status is a watershed point. Either Germany takes the necessary steps to safeguard the euro or it will collapse. These steps would include removing the administrative bias towards support of exports and the suppression of domestic demand. Without these changes, and, of course, even deeper reciprocal changes in other countries that are highly uncompetitive, to continue participating in it would be a guarantee of economic stagnation for the other Continental countries. This could have the most unfortunate political repercussions.

I exclude Ireland as our problems – bad government and bad banking – are of our own making. Courtesy of foreign investment, mainly from the US, we are also trying to export ourselves out of trouble. The irony for Germany is that the country can only export itself into more trouble.

A straw in the wind was an article which I was reading, but which I cannot track down, about industry representatives preparing for the inevitable downturn and saying that industry must build up rainy day funds to put workers on short-time and, of course, if they could not, the state should step in. Now we know that it is an article of faith in Germany that employers and workers must be left alone to work out their own destiny. In this instance, they may well be as the availability of funds will be restricted by (i) the need to put in the full cash contribution to the ESM (ii) raise the cash buffers for the EFSF and (iii) in all likelihood, fund the cost of a second bail-out for Greece.

As many of Merkel’s critics domestically have been saying, and notably Steinmeier, every delay and hesitation makes the solution more costly. In short, it is in Germany’s own interest to take decisive action.

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