This is exactly the situation in Germany. Recently forecasts for growth have been revised downwards, but so far the overall assessment is unchanged. At present there is no indication of the country heading towards recession. Inflation is low but there is no risk of deflation. From a purely national point of view Germany needs a much less expansionary monetary policy than it is getting from the European Central Bank. This is a strong argument why fiscal policy should not be expansionary, too. Where is the economic textbook that argues that such a country should run a deficit to stimulate the economy? There is hardly a convincing argument for such advice.Yet public investment is seen as too low. Infrastructure shows signs of decay, streets and bridges need repair. No doubt, these and other deficiencies are strong arguments for increasing public investment. At the same time, Germany is substantially increasing public spending for various social purposes. The obvious advice should be: restructure the budget – increase investment and reduce social spending. Again, no argument for a deficit stimulus.
Yet in never-ending debates in Europe and discussions at recent meetings of the International Monetary Fund and the World Bank, politicians and academics ignore such basic economic reasoning and demand that Berlin “do more“. The weakest argument is that Germany, unlike a number of highly indebted countries, has “room for manoeuvre“. This boils down to saying that Germany should hurry to bring herself into the same unhealthy position as that of her neighbours. There is another argument, at first sight more convincing. Germany should “stimulate growth“. This would support its neighbours because it lifts demand, and therefore imports. This view is heard almost daily in France and Italy. Yet many studies show such measures in Germany would have almost no effect on these two countries. This is not to say Germany does not deserve fierce criticism. A number of policy decisions taken by Angela Merkel’s grand coalition are misguided, to say the least. Take pensions. Germany’s population is shrinking, and ageing, faster than most. The coalition’s response is a series of decisions on the public pensions system that run in the wrong direction. They will not only have negative financial consequences, but will also deprive the labour market of skilled workers who are badly needed in sectors exposed to global competition. This is not only economically wrong. It is also unjust towards the younger generation, which will face a higher burden for social contributions combined with substantially lower pensions. There is a bitter irony here. These measures will undermine future growth in Germany and run counter to the – mostly sensible – recommendations that leading German politicians have been making to a number of the country’s eurozone partners. Add to this the introduction of a badly designed minimum wage system and a costly and inefficient energy policy and one sees how policy will seriously weaken Germany’s growth perspectives. For this, Berlin deserves all the criticism it gets. We do need a common basis for assessing appropriate macroeconomic policies. The misguided pressure on Germany to stimulate the economy via deficit spending does not belong to this canon. It is dogmatic politics prevailing over sound economics.
Hinweis: Der Beitrag erschien am 23. Oktober 2014 in der Financial Times
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The last sentence frames it all; but would anyone expect anything different ? Regarding the assessments of the IMF; sure its right to say that on a european level you would have made some achievements. Such „investments“ would increase the overall taxbase ( because of the increased production coming from the increased demand ) to be transferered to the member states most in need. But if its only for consumption purposes it does not lead to further future improvements. In fact these actions lead to a kind of stand still; you will only have another ( political ) cycle that creates time for the next actions. Now, this is nothing new to politicians – it can be found anywhere in the world. But its just not right.
Unfortunatly since the „German“ government was promoting austerity in the southern european countries ( and this especially in the pension field ) it is again kind of bitter to see them doing the exact opposite within their own borders. So is that just also ? I dont think so.