Investors were spooked recently by suggestions that global growth may be slowing. Germany came in for particular attention as industrial production and exports both fell, warning that a recession may be on the way. World leaders, especially in Europe, are once again claiming that salvation can come only when Germany finally abandons its rigorous fiscal austerity and launches a Keynesian spending binge. This is preposterous.
To start, Germany’s current fiscal posture isn’t austere. “Austerity” suggests a pro-cyclical cutting of public expenditures amid a profound economic crisis, typically to undo the distortions of previous spending binges. Germany has not practiced this at home, in its early-2000s reform period or after the 2008 global financial crisis. Nor has Berlin advocated such policies for its European partners since then. Even in the case of Greece, Germany was among those advocating aggressive fiscal stabilization to avoid a broader eurozone crisis, but the emphasis is now on making that country competitive by moderating labor costs and emphasizing innovation.
The German economy may be slowing down for a number of reasons, but none of them have been caused by austerity. The dominant factor is declining external demand. Global economic growth, and especially the growth prospects in the eurozone, have become problematic. Meanwhile, a number of international conflicts in countries such as Iraq, Syria and Ukraine have had a negative impact on Germany’s export-oriented economy.
But spending cuts for their own sake have never been Germany’s way. Government expenditures grew moderately through the early 2000s. After the crisis, they increased substantially even though the labor market had hardly been affected thanks to automatic stabilizers built into the tax and transfer system.
Instead of austerity, Germany’s economic philosophy, in the government and private sectors alike, focuses on fiscal prudence. German policy makers and voters generally believe that increasing debt levels, just because politicians are unable to convince their constituents of the need for long-overdue reforms, for instance, is not a solution. Continue reading