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A proud member of the reality based commentosphere since 2000. You can find my two Eurocent mainly at liberal and centrist discussion threads, but also at some other surprising places. Also tweeting now, as user "graygoods".

Friday, August 20, 2010

Should the US follow the German "austerity" course?

That question came up in a comment to another Krugman column ridiculing the allegedly "invisible bond vigilantes" (which weren't so invisible here in Europe at all). Brian Bolton from Boston was a bit confused about why austerity would be damaging for the US when others seem to get along with it so great: "I am with you on this but can you explain Germany? They're leading the austerity charge but are experiencing really strong economic growth."

Well, maybe I can put some perspective into this. See, the German calls for austerity in the EU (not for the US!) are based on purely political considerations. The major one is that almost nobody here really likes to use German taxeuros to bail out the PIGS (sry for that discriminating acronym, only using it because it's convenient). Those nations have to go through austerity, nobody wants to subsidize their wasteful spending, and the not-so-invisible "bond vigilantes" have already driven their bond rates up. But since it's not politically practicable to call for the austerity of others while at the same time living the high life on credit card, it was unavoidable that Germany had to lead by good example and implement cost cutting measures of its own, even though it could have afforded and used more stimulus to further reduce unemployment.

And actually, there's even an obligation for members of the Eurozone to keep the deficit under 3% of the GDP, a rule that was established because of German pressure to keep the Eurozone fiscally responsible! So, Germany had to live up both to this major principal and to the consequences of demanding others to spend less. And Merkel reacted on this by coming up with some cost cutting measures, most of which are only cosmetical, and which are dragged out over ten years to make the total amount look bigger. I guess this was seen as the best compromise that would show that we lead by example, without seriously hurting the rebound of our economy. I don't think the pundits and the political leaders can be fooled by that, but as a PR measure it seems to work. But behind the scenes, our social net is still working, stabilizing domestic demand (actually, an ongoing Keynesian stimulus), tax incentives boost investments in important sectors, and the weaker Euro fueled the comeback of our Export industries. Thus, the "economic miracle" here in Germany. Read the excellent roundup in Der Spiegel about this "Keynesian Success Story" for details.

However, the conditions in the US are different. You don't have a similarly strong social net (quite to the contrary, your jobless are threatened to be left pennyless by the Senate every few months), your industries aren't as export oriented (many managers don't care enough about that complicated foreign business) and that the dollar became stronger in relation to the Euro didn't help, too. So, obviously, you can't simply copy German policies, the situation in the States is too different. What is right for some European nations isn't right for you. The US need more stimulus to cope with the unsustainable high unemployment, or else you soon will have riots like in Greece. And as a rich country, with lots of resources guaranteeing credits, too big to fall victim to the bond raiders, you can afford another job program. Hopefully one which will really focus on improving infrastructure and create more employment this time!

(Based on a comment to that Krugman column)

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