Now, the game has switched to economics, with the German Finance minister castigating Gordon Brown for his profligacy in trying to 'spend his way out of a recession.' Who will win the battle of economics?
If past history is anything is to go by, it won't need a penalty shoot out - German growth has far outstripped UK growth since the Second World War.
The current situation is interesting because both Germany and the UK are in recession - but for different reasons. (see: German Economy in Recession)
The irony is that the recent budget of the UK (tax cuts, spending increases, higher government borrowing) would have been more suitable and desirable for the Germany economy.
Both UK and German economies have imbalances. Germany's imbalances is that they are relying too much on exports. Domestic saving is high and domestic consumption low. With high levels of domestic savings, it would make sense to encourage consumers to spend, at least during the recession. Furthermore, because Germany currently has a balanced budget (something Gordon Brown could only dream of) it gives them greater scope for borrowing during this downturn.
The Germans are in a relatively good position because:
- They aren't burdened with same levels of personal debt
- They don't have a boom and bust in housing market.
- Boosting domestic consumption would help Germany come out of recession, without causing unsustainable levels of consumer borrowing.
Paradox of Thrift.People assume saving is good for the economy. Therefore an increase in savings will always help? But, the problem is you can have too much of a good thing - especially if it occurs at the wrong time.
If German saving levels were to continue increasing and domestic consumption falls then their recession will be deep. If they encourage German consumers to spend it will take some of the slack from falling exports and help the economy recover.
It is said you save for a rainy day. - The recession is the rainy day; to persist in balancing the budget and encouraging domestic savings would only aggravate the recession. Germany can and therefore should pursue expansionary fiscal policy. - Not necessarily in the same format as the UK, there are better ways to boost Aggregate Demand than cutting VAT by 2.5%
Fear of InflationEveryone knows the social upheaval Germany suffered because of the hyper inflation of the 1920s. Ever since then, Germans have had an understandable feared hyper-inflation. But it is one thing to prudently avoid excess inflation, it is another thing to have a paranoid fear of something with no likelihood of occurring. In a recession, inflation is not the concern. ( A previous post shows how in a recession how much you may need to increase the monetary base sufficiently to prevent deflation).
Germany should not be fearing the hyper-inflation of the 1920s, they should be fearing the deflationary decade of Japan in the 1990s and 2000s.
So maybe Germany can learn something from Gordon Brown after all - it's time for the Germans to lighten up - throw away their classical economic textbooks and go dig some holes in the ground a la Keynes. Bon Chance!
Of course, after the recession is over, the UK has many things to learn from Germany not least:
- stability in the Housing market
- encouraging domestic savings
- Having a strong manufacturing sector
- Fiscal responsibility over the long term.