Eat the poor – Germany’s austerity package

Today the German government passed key measures in its austerity package first announced back in June. The stated aim is to ensure compliance with the bizarre new constitutional clause – the so-called debt-brake – requiring a balanced (structural) budget by 2016 at the latest and to get below the Maastricht 3% deficit limit by 2013. It is a sad day for the already disadvantaged in Germany and also for Europe.

The measures (here in English, hier auf deutsch) will bring about cuts totaling EUR80 billion in 2011 to 2014, of which 11bn take effect next year.  That is wrong in cyclical terms. Germany may have had a spectacularly good second quarter, but the growth outlook will certainly deteriorate and is highly uncertain going forward. Even in purely national terms discretionary tightening starting in just a few months time of around 1/2% of GDP is the wrong policy.

The measures are disproportionately targetted at the weakest in society, notably recipients of social benefit (Hartz IV), who bear almost half the burden in the first year (4.3 bn). The meanness of spirit is exemplified by the abolition of an allowance paid for two years to unemployed persons  after the initial benefit period (at a relatively high replacement rate) runs out: this will save just 200m (that’s about 0.008% of GDP!) a year, but will mean considerable additional hardship for the (approx. 100,000) people affected; these are workers made redundant 1-2 years ago, i.e. the most obviously blameless victims of the crisis. Not only do such policy choices offend normal ideas of social justice, they will maximise the negative demand effects.

The German railway (Bundesbahn) is to cough up 500million a year: why not urge it instead to invest that (and more) in the necessary future task of greening the infrastructure.

There are some bits of good news in the form of a proposed tax on flight tickets, and also the planned bank levy, while small, is welcome in principle. Yet overall, the mix of fiscal measures is wrong. Measures should be progressive in distributional terms, hit the instigators of the crisis rather than its victims, minimise demand effects, promote investment and be green. In most cases the measures passed by the conservative-liberal government are not, and in many cases they are the opposite.

And last but not least there is Europe to consider.  Austerity in Germany will also hit demand in other countries (although the size of that effect will not be substantial). The point is that Germany’s massive trade surpluses and low financing costs mean that it has more fiscal room for manoeuvre than other countries.  Competitive rebalancing in the euro area, and thus the recovery of countries such as Greece and Spain, desperately needs faster growth and faster wage and price increases in Germany. A more expansionary fiscal policy would help on both counts, and assist other countries in digging themselves out of their fiscal and economic hole.  If you are very very optimistic about the German economy going forward, you could just about justify the package in national cyclical terms (but in no way the mix of measures), but economic policy is supposed to be a matter of common interest between EU Member States! Seen in the European context the package is completely wrong-headed.

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