The Germans Have Learned Nothing

by Andreas Hoffmann

Ever since the beginning of the EMU crisis, politicians, journalists and economists have blamed Germany’s “fiscal austerity” for the prolonged troubles in Europe’s periphery. If only the Germans spent more on goods and services, so the idea, the people in the periphery countries of Europe could sell more stuff. Exports would help their economies recover.

The German government, however, is found to engage in fiscal austerity. The recent budget surpluses even seem to annoy people. B. Setzer wrote (mischievously): “Germany has fiscal space even by German standards!”, and she should use it for the good of Europe. But she won’t. P. Krugman adds that Germany’s restrictive fiscal policy was a “drag” on growth in Europe. The Germans seem to have learned nothing from the crisis!

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Austerity in Germany – A Keynesian Case

by Andreas Hoffmann*

The positions about economic policies could not have been more divided between Germany and the US during the latest G-20 summit.

On the one side, Barack Obama pushed Keynesian arguments about the need for further stimulus and the danger of austerity measures for economic recovery. On the other side, Miss “No” is back. Merkel promoted consolidation measures to prevent future debt crises and regain markets’ trust in sustainable government finance. And this time Merkel did not cave into US pressure.

I collected some arguments of why this may be a good idea:   Continue reading

Germany’s Foolish Idea

by Mario Rizzo  

An elementary lesson of economics is this: If the benefits of an action accrue to the agent but many of the associated costs can be shifted to another party, there will too many such actions. 

Consider now Greece. Its welfare state is out of control. The effects of this fiscal problem threaten its bond ratings. It is in violation of the fiscal rules of the European Union.  At the same time, the value of the euro is threatened. The German government is thinking seriously of bailing out the Greeks with debt guarantees to avoid contagion effects.  

So now the problem of moral hazard raises its ugly head. The power of precedent is such that if Greece is bailed out, what incentive is there for other countries to restrain the growth of their expenditures?  

I do not believe that even if Greece defaults on its bonds that the contagion effects would be intolerable. But the main problem is that the unsustainable welfare states in Europe and the United States are, well, unsustainable.  

People like to deny reality when it is unpleasant. This is not just a problem of bad leadership. It is a problem that goes to the heart of the fantasy world the typical voter lives in. But reality bites. Let’s see how it does so in the next few years.

In the meanwhile, we can hope that the German government comes to its senses.

Angela Merkel Continues Her Reisistance to “Crass Keynesianism”

by Mario Rizzo

Macro-policy economists are in a bad way. They cannot stand dissent. The New York Times reports that Angela Merkel’s government refuses to start spending as if it were going out of style. She sees the current crisis as the result of distortions caused by excessive and misdirected credit. Paul Krugman has also expressed frustration with the German lack of enthusiasm for a big stimulus. To give the reader the feel for this apoplexy: Continue reading