How’s That Medicine Taste, Germany?

Germany, the powerhouse of Europe, experienced negative growth in the last three months of 2012, down from a positive growth rate of 3 percent in 2011. Chancellor Angela Merkel, who more than any other leader inflicted austerity on the rest of Europe, is finding that what goes around, comes around.

All of the small nations that have bowed to Germany’s austerity demands—Greece, Ireland, Spain, Portugal—are stuck in an even deeper downward spiral. They cut spending, but their deficits increased. Why? Because the hit to employment, consumption, and then to government revenues leaves their economies in deeper distress.

This is a path to permanent depression. It is economic madness, a fact recognized by no less than the chief economist of the International Monetary Fund (IMF), the organization that has been Germany’s partner in enforcing austerity. The IMF’s Olivier Blanchard, in a paper released January 1, warned that the negative effects of austerity far outweighed the positive ones.

It is somehow fitting that Germany should not be immune from the prop-wash of its toxic policies for the continent. A lot of panicky capital fled to Germany, giving the Germans the continent’s lowest interest rates—a big competitive advantage against their suffering neighbors. Germany’s exports also benefit from an artificially cheap currency. German economists have calculated that if they still used the Deutsche Mark, it would be about 40 percent more expensive.

There are the people who gave us the word schadenfreude—defined as joy at someone else’s misfortune. But evidently in a European union, misfortune doesn’t stop at national frontiers.

Meanwhile, the EU itself is coming apart at the seams. British Prime Minister David Cameron is scapegoating the EU for his own self-inflicted austerity policies, and is calling for a referendum that could lead to Britain’s exit from the union. While other EU member nations were driven to austerity by the Germans, Cameron volunteered for the cold bath cure. Thanks to Cameron’s policies, Britain went back into recession in 2012, with a higher debt ratio than before, came briefly out of it, and now faces the prospect of an unprecedented triple-dip recession.

Spain is in more dire straits than ever, with unemployment above 25 percent, and Italy, never a breeze to govern, faces the possible return of Silvio Berlusconi as prime minister. A fine mess.

The lesson for the United States: Austerity doesn’t work in a prolonged slump.

President Obama, since the election, has made good progress in fighting off the Republican demands for deep budget cuts. But he still seems to believe that we need substantial deficit reduction in the short term. We don’t. The time for that is after the recovery comes. Otherwise, prosperity will be a long time coming.

Comments

In 1923, a US Dollar was worth ~$4.5 trillion Marks (many Germans referred to it as Jewish confetti). Some historians think hyperinflation was instrumental to the Nazi takeover in the early 30's. Point is, just how much more money do you think they should print or borrow to keep their austerity at bay?

I know what you mean and I want to read more about this subject! Also it is the same situation in many countries from Europe and not only. To bad that we don't have a certain strategy!

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