Germany's economy – A little stimulus

Even in recession, Germany is the last of the small spenders

CHINA is to spend $586 billion to prop up growth. Japan plans $275 billion-worth of economic stimulus. America’s government is expected to pump out still more cash. Into this fiscal pot Germany has tossed a few coins: it has unfurled an “umbrella for jobs”, 15 small-bore measures that include €12 billion ($15 billion) of fresh spending over two years, or roughly 0.25% of GDP. This will trigger €50 billion of investment, promised Chancellor Angela Merkel. But pressure is on the world’s third-largest economy, which sank deeply into recession in the third quarter, to do more.

The German budget was close to balance in 2007 and may be in surplus this year, a claim few other rich countries can make (see chart). The world’s biggest exporter of goods boasts a current-account surplus that is expected to reach 7% of GDP this year. Rather than spend, Germans have been paying higher taxes and exercising wage restraint to make their firms more competitive: consumption has been flat. This suggests that Germany should be among the first to seize the Keynesian moment that the financial crisis has brought about. Its trading partners certainly think so. Germany “has the possibility to use tax policy to support demand,” says the European Union’s economics commissioner, Joaquín Almunia.

So what holds it back? Spending packages enacted to fight slumps in the 1970s produced little but new debt. Since then the prevailing wisdom has been that they do not work. Governments that boost spending in bad times rarely pare it back later. When people see that debts, and thus taxes, are heading up they tend to save more rather than spend, says Joachim Scheide of the Kiel Institute for the World Economy (this phenomenon is known as Ricardian equivalence). The grand coalition of Ms Merkel’s Christian Democratic Union (CDU) and the Social Democratic Party (SPD) was set on balancing the federal budget by 2011. The target will not be met, the government admits, but that is no reason to splurge. Even the term economic package is taboo. The umbrella “is not a stimulus package of the old style,” insists the finance minister, Peer Steinbrück.

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Comment:
Whereas all other countries or economies spend tremendous amounts of money to get out of the recession, Germany has been more than moderate, which is very fascinating. One of the reasons is probably that Germany has a way better economic foundation, such as levying huge amounts of taxes, than most other countries do and additionally the fact that they are the world's biggest exporter. So, with these prerequisites Germany needs a little stimulus to boost the economy than their counterparts need. If Germany's plan works out, will be very interesting to follow.

Oezguer (Oscar).