Germany's Unrealistic Economic Policies

by John M. Curtis
(310) 204-8700

Copyright June 21, 2010
All Rights Reserved.                                

             Heading to Toronto June 26 to resolve the world’s economic woes, the G-20 showed strong divisions with German Chancellor Angela Merkel rejecting President Barack Obama’s call for more economic stimulus.  Faced with mounting debt and eroding currency values, Merkel rebuffed the American way of doing business, where a more generous Federal Reserve Board hopes to put more cash into circulation to stimulate the economy.  Germany’s Finance Minister Wofgang Schaeuble rejects extending more credit to eurozone members, believing that more debt erodes the euro’s value.  “Nobody can seriously dispute that excessive public debs, not only in Europe, are one of the main causes of the crisis,” said Schaeuble, citing counterproductive economic principles.  If European countries have no cash, like Greece, there’s no way to reduce public debt.

            Europe’s Central Bank resides in Frankfurt, attesting, if nothing else, to the control Germany has over Europe’s monetary and fiscal policy.  Germany’s approach toward Greece has been unrealistic, not empathizing with less industrialized southern European countries that can’t compete with Germany, the world’s leading exporting power.  Germany doesn’t quite get that if other eurozone countries are out of cash because of extreme austerity measures they can’t promote economic growth.  Devaluing the euro may hurt Germany, France or the Netherlands right now but it’s a good long-term strategy to save the euro.  Current overvaluation, more than any other reason, has piled up debt in less industrialized countries.  Had Obama, or, for that matter, former President George W. Bush, applied Merkel’s economic theory, the U.S. would be facing another Great Depression.

            Putting cash, whether increasing debt or not, in taxpayers’ pockets helps stimulate the economy.  Cash-strapped eurozone countries crave a liberal monetary and fiscal policy that enables consumers to continue spending.  “That’s why they have to be reduced,” referring to eurozone’s overall debt to GDP rations.  Greece runs at about 13%, debt-to-GDP, when the ECB urges countries to remain at three percent.  For Greece, Portugal, Spain, Italy, Ireland and other less industrialized countries, they can’t meet payroll obligations for state workers or pensioners without carrying such heavy public financing.  Eurozone countries finance longer vacations, earlier retirements, more complete health care and lucrative pension benefits than the U.S.   Forcing cash-strapped eurozone countries into intolerable austerity programs invites a revolt from continued participation in the eurozone.

            Merkel and Schaeuble don’t understand that Europe’s future is best served by carrying more debt and devaluing the common currency.  Bush and now Obama, under the direction of Depression-era expert Fed Chairman Ben S. Bernanke, have continued a loose monetary and fiscal policy to keep banks and consumers with enough cash to continue GDP growth.  Merkel would have the eurozone stagnate as long as members continue to reduce debt.  Lower euozone debt means a stronger euro.  As long as the euro remains inflated, it’s impossible to drive exports and provide adequate public financing to meet governments’ obligations.  “We well face up to the international debate and I think we can do that with a great deal of self-confidence,” said Schaeuble, hinting that German will oppose any attempt to spread Obamanomics in Europe, namely, increasing debt for economic stimulus.

              Germany’s Economic Minister Rainer Bruedele insisted that the U.S. should urgently join the EU in cutting spending.  “It’s urgently necessary for monetary stability that public budgets return to balance,” turning prevailing economic theory on its head.  Tightening credit contracts spending in already recession-prone or slow growth economies.  “This is something we should also tell our American friends,” said Bruedele, urging Fed policy makers to transform the Great Recession into another Great Depression. Bernanke correctly figured out that economic stimulus is more important than austerity designed to boost the currency.  Cutting debt, imposing austerity measures and discouraging spending contribute to slower growth.  Instead of re-inflating the euro, Germany and the ECB should be more concerned with struggling economies looking for more stimulus.

            Since the euro experiment began in 1999, Germany has tried to maintain the value of its old Deutsche mark, forcing less industrialized eurozone countries to cover its obligations with an inflated currency.  Germany can’t have it both ways:  Controlling a common currency and, at the same time, berating less industrialized members for running into debt.  No eurozone country—including France—can compete with Germany because of its enormous trade imbalance, where it exports far more than it imports.  While there’s nothing wrong with Germany continuing its export economy, there’s something very wrong—and unrealistic—expecting other eurozone countries to follow Germany’s lead.  When Germany pushed for euro in 1999, they knew they’d lose value relative to the Deutsche mark.  Imposing German standards on other eurozone countries has been an economic disaster.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.