On What Germany Has Learned About Debt And Other Links

Topic of the day: German economic policy

This Op-Ed in the New York Times echoes some themes I laid out in "Lessons We Can Learn On How Stimulus And Jobs Programs Failed in Eastern Germany" and deserves reading.

The point is not that austerity is good but rather that "Germany has… a strategy. [It] will launch… next year (unlike most of its European peers, Germany still has an expansionary budget in 2010) with saving measures representing less than 0.5 per cent of GDP." These are the words of Germany’s finance minister. The Germans are attempting to thread the needle between austerity and stimulus during a period of slowing economic growth and a sovereign debt crisis. Will they succeed?  Time will tell. Also see Why I am siding with the Germans on fiscal consolidation.

The Usual Fare

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13 Comments
  1. Daniel says

    Spiegel reports that Q2 growth in germany was much stronger than expected (1,5% not annualized)

    “Spiegel”: Deutsche Wirtschaft wächst laut Regierung stärker

    https://de.reuters.com/article/economicsNews/idDEBEE66G05020100718

    if the unemployment rate really falls below 3 million, the whole “Lehman effect” would be gone.

    Arbeitslosenquote aller zivilen Erwerbspersonen, Originalwerte, Prozent

    https://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/DE/Content/Statistiken/Zeitreihen/WirtschaftAktuell/Schluesselindikatoren/Arbeitslosenquote/bild__alqinsg,property=image.png

    1. Marshall Auerback says

      Yes, Germany is currently benefiting from the weaker euro and the corresponding lift it has given to its external sector. The fiscal deficits in most countries probably got big enough to sustain some aggregate demand in the euro zone, until renewed solvency concerns shut the funding down from the markets. AND we have yet to see the impact of the austerity measures which have only just been implemented. But the underlying structural problems are still there and likely to get worse again by the end of the year if these austerity packages come into effect. IF being the the descriptive word – will Germany tie its own noose…for real? Clearly the models do not incorporate the downward spiral that will be the Eurozone if the great fiscal austerity experiment is initiated. Furthermore, the only austerity measures built into the models are likely that for those countries whose lawmakers have officially passed these measures: Greece, Portugal, etc. . Germany and the stuff to be debated (Spain’s labour reform??) is likely NOT in the forecast. So don’t start celebrating prematurely, Daniel. The US was looking pretty good until a couple of months ago.

      1. Edward Harrison says

        By the way, Paul Krugman has a rebuttal for Cowen (and me) on stimulus. Here is the link:

        https://krugman.blogs.nytimes.com/2010/07/18/more-stimulus-despair/

        I’m not convinced by his arguments but it will be in tomorrow’s links.

        1. Marshall Auerback says

          Yes, there wasn’t really fiscal stimulus in Germany after 1992. Another myth perpetuated by the other side.

        2. Nicholas Battey says

          Not an economist, but PK does make some important distinctions that greatly separate the early 90’s Germany from today. The zero bound changes the deficit/inflation usual concerns. Also, is Germany’s lower unemployment rate due to more social support and much reduced working hours? How could austerity affect this, if not surely for the worse?

      2. Daniel says

        I’m not celebrating, I’m also in the Richard Koo balance-sheet recession camp.

        But I also think that we shouldn’t ignore positive surprises. Unfortunately, they seem rare. The fact that the german economy shrank 5% in 2009 yet the unemployment rate didn’t rise significantly is a big positive surprise. If you take a look at the linked chart, you could guess that germany had a slowdown in 2009 and not the worst recession in modern history.

        1. Marshall Auerback says

          Don’t disagree. I also noted the German data as one reason why we might get a rally in the euro. However, it’s too early to make the call that Germany has turned the corner.

  2. Edward Harrison says

    The German example is more about the ability of stimulus to move idle labor into productive employment. The zero bound is irrelevant frankly. The question is whether works programs and fiscal stimulus if used in large enough measure can always close an output gap. I say no. People like Bill Mitchell say yes. I see eastern Germany as a prime example of the limits of stimulus. Industrial re-organization takes time and no amount of stimulus gets you away from that. See the two links highlighted from today.

    https://pro.creditwritedowns.com/2010/07/economists-on-jobs.html

    If you try to stimulate to close a gap that can’t be closed except over time and through economic ‘recalculation,’ malinvestment will be the result. That is certainly what we saw in Germany. Again, Bill Mitchell says the Germans needed to do MORE – something which flies in the face of any reasonable understanding of the politics of the situation.

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