Has Angela Merkel outlived her usefulness?

Steven Hill’s recent paean to Angela Merkel on the SEJ website (18/08/10) may yet prove woefully ill-advised. For although he is correct in arguing that ‘social’ Germany is well ahead of the USA is many respects, his endorsement of Merkel’s economics is—to put it as politely as possible—somewhat overenthusiastic.

Doubtless he (and others) will want to argue that Germany’s record second-quarter growth of 2.2% proves the point. In truth, it does nothing of the sort. Although German growth lifts the Eurozone average, it will help the deficit hawks sell their programme of cuts to social services which lie at the core of ‘social Europe’.

As both Andrew Watt and John Palmer warn on this site, deficit hysteria threatens not just economic recovery but the decent European social standard which lies at the heart of policy making. To be fair, Merkel has been better on some things than Tim Geithner and Larry Summers, but then neither is a champion of progressive social policy. Germany is right to want tougher financial regulation, just as it was right to back short-time working rather than allow unemployment to swell uncontrollably. Doubtless the German car-scrappage scheme was better than nothing at all. And Germany did adopt a stimulus programme in 2009 worth 2% of GDP.

But Germany’s growth spurt is mainly the result of selling more exports outside the Eurozone, particularly in Asia where demand has remained buoyant. This may prove temporary if (a) China’s growth slows; and (b) the euro strengthens again. Equally, German domestic household demand has remained flat precisely because the export-led growth model has depended for nearly two decades on wage compression at home. What has helped boost domestic demand is public spending. The problem is that the German stimulus programme stops at the end of this year, and the first elements of the new austerity plan will begin to bite next year as the country attempts the cuts needed to balance the budget by 2015. As Paul Krugman argues, because Germany’s stimulus package was smaller, Germany’s GDP fell more than that of the USA during the recession—there is no reason to believe its recent growth spurt is permanent.

source: Krugman, P ‘What about Germany?’ New York Times, 24 Aug 2010

Budget balance may appeal to bankers, but it is not what Europe needs at this stage. Cuts in Cameron’s Britain will bring a double-dip recession. In both Greece and Ireland, the policies of the deficit hawks are failing to reduce the budget gap. Cutting government expenditure reduces aggregate demand and drives down national income, which in turn widens the budget gap because tax receipts fall rapidly and social transfers increase.

Unless Germany can find some way of abolishing the business cycle (not just in Germany but throughout those regions to which it exports), constitutionally-embedded budget balance is nonsense. What Germany needs is not budget balance, but a more balanced model of economic growth.

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