Austerity Hits Germany

What goes around comes around. This is at least as true in economics as anywhere else. Take the wave of austerity policies in Europe. Germany has been one of the big champions of forcing countries like Greece and Spain into panic-driven combinations of spending cuts and tax hikes. The attitude in Berlin has been that those countries deserves what is coming to them. As an example of that attitude, the EU Observer reports:

“Austerity measures are in the interest of the countries where protests are being held,” [German] Chancellor Angela Merkel’s deputy spokesman said Friday in a reply to a question about the Spanish anti-austerity demonstrations. He added that the German leader was “not concerned” about her image as main promoter of austerity.

Well, according to another report from the EU Observer:

Germany’s economic growth has slowed to a meagre 0.2 percent, as most other eurozone countries are in recession and  austerity measures are taking their toll on German exports to southern countries. The eurozone’s overall economy shrank by 0.1 percent compared to the previous three months, the bloc’s statistical office (Eurostat) reported on Thursday (15 November). The 17-nation area had already slipped into recession over the summer, with Greece, Portugal, Spain, Italy, Cyprus and the Netherlands continuing the negative trend.

The euro zone has been suffering from paltry growth for a couple of years now, and the more the austerity policies proliferate, the deeper the recession will get. The big question now is of course what Chancellor Merkel has in mind for the German economy. With the German GDP grinding to a halt it is only a matter of time before the federal German government will run into some urgent budget deficit problems. When they do, is Merkel going to copy the policies she wants other countries to continue with?

The EU Observer goes on to report that the German economy…

…has slowed from 0.5 percent growth in the first quarter to 0.3 percent in the second and 0.2 in the third, with the country’s central bank warning of stagnation and even recession in the months to come

What Germany and other European countries need now is a major boost in economic freedom: lower taxes, structurally reduced government, less regulations and a completely new set of fiscal policy rules: growing employment and growing household income should replace the ridiculous requirements of balanced budgets embedded in the constitution of the EU. However, as the EU Observer explains, there is very little hope for such a turn for the better. Listen to what the German treasury secretary has to say:

Speaking at an economics forum in Berlin on Thursday, German finance minister Wolfgang Schaeuble made the case for “sustainable growth” – meaning modest growth rates not based on real estate bubbles or consumer credit. “We must strive to become a stability union, where fiscal rules are respected” Schaeuble said, one day after massive protests and general strikes took place in Portugal, Italy, Spain, Greece and Belgium against what is seen as a German-led austerity drive. “I have great respect for the demonstrations in these countries,” the German minister said. But he continued to make the case for structural reforms to make an ageing and costly Europe more competitive in relation to China and India.

What those reforms might be is of course held in the dark. Truth is that both China and India have smaller governments, in fiscal terms, than Europe. This keeps operating costs down and allows for a more dynamic evolution of all kinds of entrepreneurship. The only way Europe can compete is by rolling back its ridiculously large welfare state.

That, again, is not going to happen. Schäuble makes clear that he is more interested in a “stability union” than anything resembling a growth union. By “stability union” he means a union that continues to enforce economically harmful balanced-budget criteria at any cost, as has been done in Greece, Spain, Portugal and other countries.

Even more torubling is the point he makes about credit-driven growth. It is true that both the United States and Europe have experienced credit-driven growth periods over the past two decades, and that such growth is not a sustainable path to prosperity. However, there is a very important reason why recent growth periods in Europe, and to some degree the United States, have been credit-driven: high taxes. The more government takes out of private-sector earnings, the less people have left to spend and advance their lives with. As consumers are left with less, there is less of a market for private businesses to sell new, better, more efficiently produced goods and services. With a decline in such markets, the economy is destined to grow less.

Over the past 30-40 years taxes have reached such levels in most of Europe that you hardly feed a family on two incomes any longer. The standard of living that Europeans can attain becomes, essentially, a stagnant standard of living. The only way out for a family who wants to buy a new, safer, better, more efficient car is to do it on credit. This proliferates into more and more areas of consumer spending, from homes and cars to appliances, vacation trips and even computers. With more and more private spending being fueled by credit, credit default becomes a growing problem.

That is where Germany is today, as this blog recently reported.

On a larger scale, the welfare state – the entity that taxed the private sector into credit dependency – becomes the next victim. As private incomes stagnate, the tax base stagnates. But government spending never stagnates, thus pushing the government budget into a deficit.

Which is precisely where virtually all euro-zone member states find themselves today.

The way out is not more government, not stricter “stability unions”. The way out leads through the portal of economic freedom.

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  1. Pingback: BERLIN – Germany’s economic growth has slowed to a meagre 0.2 percent, as most other eurozone countries are in recession and austerity measures are taking their toll on German exports to southern countries. « Family Survival Protocol