The Odd German Theory: Growth And Austerity Go Together

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Ahead of the G20 meeting in Toronto and on the heels of a series of austerity programs announced by countries throughout Europe, Germany has argued that its austerity program goes hand in hand with growth. It is an odd claim since most economists believe that  government spending cuts and job eliminations slow GDP growth.Wolfgang Schäuble, Germany’s finance minister, told the FT that “The German government knows it has a responsibility to promote growth in Europe and the world. We will rise to it not by piling up public debt but by fulfilling our traditional role as an anchor of stability.” But stability is only one part of the foundation of growth. Consumer spending and capital investment by companies are just as essential. Germany wants to increase taxes and cut public works programs. It also plans to lay-off thousands of government workers.

In support of Schäuble, Prime Minister Angela Merkel told The Wall Street Journal that “Germany’s growth and employment are rising—and therefore the world’s fourth-largest economy has no reason to rethink its dependence on its powerhouse industrial sector and large trade surplus.” Germany’s employment rate will not improve if the nations that buy its good cannot sustain their own recoveries. Germany’s industrial sector relies on the growth of the largest nations in the world and its own Eurozone “allies.” The austerity measures in Greece, Spain, and even the UK could bring their GDP growth to a halt. And, higher taxes on consumer spending are often regressive. The new UK VAT has just as much chance to undermine consumer activity as it does to bring the government more revenue.

There is a debate in the U.S.  about whether the $787 billion stimulus package worked. Even if the answer is “no”, voters have lost their taste for deficit spending and the mid-term elections are likely to drive that point home. A recent Wall Street Journal poll showed that incumbents will face an uphill battle in many districts.

Merkel’s economic policy is based on forecasts that likely won’t pan out. Germany will cut spending and raise taxes. That is certain. What is not at all certain is that its trading partners can do the same thing successfully.

Douglas A. McIntyre

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