Merkel Awaits Obama

I’d like to take up again the subject of the rather unconventional German governmental response – so far – to the surging economic troubles to be found in Germany as well as more widely, prompted as I am to do so by the reader response I’ve received. You might recall that we can summarize that response as “Times might be tough, but there’s no need for this government or any other to spend huge sums, go way into debt, or otherwise endanger the EU’s Stability Pact that is supposed to underpin the euro.” (But also remember that this unorthodox position seems to be held only at the German government’s top levels, with plenty of insistent calls to start spending coming from elsewhere, including lower-down in that same government.)

This whole question in its broader sense – which could be phrased, ¡¿Caramba!, what can we do to stop the onrushing Great Depression? – is put into sharp relief by a commentary from Thursday in the Financial Times by the historian Niall Ferguson* (in English of course: The age of obligation, h/t to Naked Capitalism).

Ferguson notes: “What makes this crisis of burning interest to financial historians is the knowledge that we are witnessing a real-time experiment with not one but two theories about [counteracting] the Depression,” namely 1) In the style of Milton Friedman, have your central bank flood the financial system with liquidity, and 2) In the style of Keynes, run huge public deficits to boost demand. But note that, while “we” are certainly already witnessing this dual approach with the United States, that is not the case for Europe. Especially for countries on the euro, whose monetary policy is therefore run by Jean-Claude Trichet and his European Central Bank (ECB), you can’t say they are doing approach #1 (Friedman), among other reasons because of the political divisions that still exist under this umbrella of monetary unity. Colorado (say) has no problem with most of the Federal Reserve’s bailout monies going mainly to New York-based financial institutions, because that is precisely where most of the problems of threatened insolvency have been. On the other hand, indications are that most of the acute threatened insolvencies within the euro-zone are to be found in Spain, and maybe Italy and Ireland too, and it would be hard to get the electorate of Germany and other EU countries to agree to directing a flood of ECB money in those directions – the “solidarity” is simply not there yet.

Then, turning to Ferguson’s theory #2 (Keynes), we can see that that approach is at least not being adopted in Germany precisely because of top German leaders’ insistence (so far) that nothing of the sort is needed. That stance may be right (I repeat here a link I provided in a previous post giving an argument why it could be right), or it may be wrong (Paul Krugman calls it “boneheadedness”), but there is little question that it is pretty daring in view of the pressure to “do something!” that inevitably results from the sort of bleak economic prospects that are bearing down on Germany (e.g. a predicted shrinking of GDP by 3% next year).

The Lady’s for Wilting

Or at least it was daring. Because now it seems that Merkel is wilting somewhat under the pressure. She took the opportunity of a speech she gave before the Zentrum für Europäische Wirtschaftsforschung in Mannheim earlier this week to try to throw some bones to the rabid “Do something!” dogs snapping at her heels (as reported, among other places, both in Die ZeitMerkel promises a further packet-of-billions – and in the FAZMerkel: In January once again a few billions). Note, however: even from the headlines you can tell that that “second stimulus packet” she promises for next month is, just like the first one, to be measured in the tens-of-billions of euros (probably beween 20 and 25 billion, the FAZ reports) – again, when German GDP is somewhere around €3 trillion! And check out what she is also reported to have said: “We’re of the opinion that, if it suffices for America to wait for the new president to come into office to make a big program, then it will also be correct in Germany to delay a second [stimulus package] program to a similar time.” So she takes the fact that Obama is not yet in office as an excuse not to act now, completely ignoring that 1) That mandatory waiting-for-Obama is not some sort of policy decision by the US government, but rather a provision of the American Constitution (a regretable one, yes, as this weblog has had occasion to note); and 2) America has already spent heavily – like, maybe, at least $700 billion – in the cause of bailouts and fiscal stimuli.

And then, when the issue naturally arises about what those additional billions of euros coming in January will be spent on, Merkel then stirs up yet another hornet’s-nest by opining that maybe it’s time for the old West Germany to get some funding for infrastructure improvements, that the former East Germany has had enough. (You can read about that here in English.) Ay-yi-yi! Frau Merkel, there is a federal-level election coming up next year, you know!

Anyway, the bottom-line here appears to be that that “no serious fiscal stimulus needed here!” attitude held by the top German officials (from both Left and Right on the political spectrum, remember) is still operative, it’s just that those officials will be trying to do more to disguise it. Me, I take position derived from Prof. Ferguson’s analytical framework, namely that while some countries are indeed pushing ahead in fighting the economic bad times using both Friedman and Keynes, at least one is really using neither. It is indeed a fascinating real-time experiment in the application of economic policy measures that is playing out before our very eyes, one which can’t fail to produce valuable lessons for the future if we can continue to observe and analyze it properly – that is, if we, public order, Western civilization, etc. can survive the next few years.

* If readers do not already know, then they certainly should: Prof. Ferguson has been the attention-grabbing young historian for at least ten years now, with a stream of books and other publications to his name dealing with such issues as empire, war, colonialism, and financial history. His hot-off-the-presses hit now is The Ascent of Money: A Financial History of the World, whose publication last month represented a miracle of timing that, for him at least, constitutes one of the few silver linings to issue out of the darkening financial and economic clouds. I’ve got my copy secured, and will be reading it soon; somewhat surprisingly, that link indicates that it is still in stock there. You might even say that the fact that I do not have any “affiliate program”-type deal hooked up to those links to his book – so that if you use them to go buy your own copy, it does not benefit me in the least – constitutes my own sort of “cash-left-on-the-barrelhead” recommendation of the work. Except that I don’t do that sort of thing anyway.

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