The Germany That Said No
The stimulus pleas of the Obama administration fell on deaf ears in Berlin. Guess whose economy is growing faster.
Nov 8, 2010, Vol. 16, No. 08 • By CHRISTOPHER CALDWELL
So when Obama administration officials urge Germans to stimulate, they are wrong, but not for the obvious reasons. It is not that they want to impose socialist programs on a capitalist system that is doing well without them. It is that they want to impose demand-stimulating programs on a system that is already absolutely glutted with them. It is as if the administration’s approach were to take as a baseline whatever any given government happens to be spending, and then to insist that the figure should be, say, 10 percent of GDP higher. This is about as reasonable as assuming your child will be half as likely to get pneumonia if you send him off to school wearing two down parkas.
On top of its automatic stabilizers, Germany has engaged in the sort of big, one-shot expenditures that we tend to associate with the word “stimulus.” It spent 84 billion euros in the wake of the financial collapse. It has made its largest tax cuts in 16 years, according to government officials, which have been releasing 22 billion euros a year into the economy. What is more, German exports have been growing more slowly than imports, which results in an incidental “demand boost” to the global economy of $74 billion, according to Hans-Werner Sinn, the country’s best-known budgetary economist.
Merkel made some concessions to the U.S. position after the Pittsburgh G-20 summit in 2009. But she urged ending any one-shot stimulus programs in a timely way. Two years seemed to her a good deadline for unraveling such programs, first the fiscal and then the monetary ones. German economists have defended her position. “When, if not now, should the state begin to save?” wrote Sinn over the summer. Like many Germans, Sinn is nervous about the effects of U.S. deficits on the global economy. Washington’s promises of savings are vague, abstract, and deferred. Sinn believes the United States is merely “seeking allies for its own debt policies, which have surpassed any justifiable level.” The U.S. budget deficit is 12.5 percent of GDP. Forty percent of the federal budget is being financed by borrowing, and most of that borrowing is being done abroad. “Where all this will lead to,” Sinn writes, “heaven only knows.”
As the world’s second-largest exporter after China, Germany is more entangled with the fate of the world economy than any other country, possibly including China. One of the striking surprises in a visit to government offices in Berlin is the attention Germans are paying to the views of David Cameron, the new British prime minister, on the international economy. Cameron has surrounded himself with fiscal hawks. The government’s recently published spending review calls for cutting the size of government by a seventh in the next five years.
Although he backed Gordon Brown’s bank rescue plan in the immediate aftermath of the bank bailouts in 2008, Cameron, who is as widely read in economics as any Western leader, has an analytical objection to stimulus. It is that stimulus leaks. His understanding of our predicament seems to be roughly this: Some countries have current account deficits. That is, they import a lot more than they export, and cover the difference by borrowing money abroad. The current account deficits of the United States and the United Kingdom are spectacularly, dangerously large. Those deficits are a measure of the amount of credit that used to be sloshing around the U.S. economy. They helped crash the financial system, leaving people with less money to spend, which in turn threatens further economic contraction. To avoid that contraction, the government can stimulate, and if it does, people will keep buying things. But there is a problem: Why should their buying habits differ from the ones that got us into this mess in the first place? All you do by stimulating is prop up real estate prices at ultimately unsustainable levels and keep the flow of junky toys coming from China.
This, it seems, is the light in which Sinn and Germans in positions of power in Berlin understand the U.S. bullying on stimulus. Think of the global economy as a big, glitzy barroom. The Obama administration sold the stimulus (successfully) to Congress and (unsuccessfully) to the public at large as a way of getting us more drinks. But, in a global economy, what we are doing is standing rounds for the entire establishment. U.S. policymakers have come to realize that if other patrons don’t start standing rounds, too, we’re going to run out of money soon. Hence the tendency to cast the nonstimulators as a bunch of ungrateful jerks. Germany is suggesting a different view: Maybe everyone ought to mind his own business and buy his own drinks.
This is consistent with Germany’s approach to its other big economic headache. Over the past year, the Greek government’s creditworthiness has been blown down in a hurricane of political corruption scandals. Until a bailout plan was arrived at early this year, the fate of the common European currency, the euro, seemed to be in question. Germany has been a big beneficiary of the euro—its willingness to surrender its stable currency, the deutsche mark, allayed French worries about Germany’s ambitions and made the country’s reunification possible after 1990.
Germans see this. Still, they have been unwilling to turn the EU into a “transfer union” in order to prop up mismanaged countries like Greece, particularly after Bild and other German tabloids began describing how Greece allowed its workers to retire a decade earlier than German ones, and noted that the highest concentration of high-end Porsches in the world was to be found in Athens, supposedly broke and in need of German handouts. Merkel acceded to a package of loan guarantees after considerable arm-twisting by other European governments (and after Geithner called finance minister Wolfgang Schäuble, according to German sources, with the news that the Greek situation was making itself felt through a sell-off in U.S. bank stocks). But Germany continues to block every effort to create common European debt instruments, and to urge that any rescue plans be built around haircuts (losses for bondholders) rather than third-country bailouts.
Germany’s economic dependence on exports has left it correspondingly entangled in multilateral institutions. But there has been a change in Germany’s stance towards the world in the past half decade. For a half-century after World War II, Germany had to reestablish its credentials as a civilized country. This meant deferring to France on matters affecting Europe and deferring to the United States on matters affecting international security. But now Germany has been a pillar of good global citizenship for 65 years. The natural consequence is that Germany claims considerably more leeway to act in its own interest. We may regret the end of German docility, but we should not pretend to be mystified by it. In a sense, Barack Obama is relearning the lesson that George W. Bush learned in the run-up to the Iraq war in 2002 and 2003. Germany showed then that it would not support a war it didn’t believe in just to show itself a nice guy. It is not going to bail out floundering foreign economies to show itself a nice guy, either.
Christopher Caldwell is a senior editor at The Weekly Standard.
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