Germany Defies Keynesian Stimulus And Recovers!

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From The Daily Capitalist

Back in August 2009 I made a bet that Germany would recover before the US because they were doing far less stimulus than were we. In fact Germany's Chancellor Angela Merkel said:

“The crisis did not take place because we were spending too little but because we were spending too much to create growth that was not sustainable. It isn’t just that the banks took over too many risks. Governments allowed them to do so by neglecting to set the necessary [financial market] rules and, for instance in the US, by increasing the money supply too much.”

 

[Mrs. Merkel] is robustly unapologetic when discussing the origin of the global financial meltdown. The fault, she says, ultimately lies with misguided efforts in the US, both by the government and the Federal Reserve, to re-start artificially the economy after September 11 by pumping ever-cheaper money into the financial system. “We must look at the causes of this crisis. It happened because we were living beyond our means. After the Asian crisis [of 1997] and after 9/11, governments encouraged risk-taking in order to boost growth. We cannot repeat this mistake. We must anchor growth on firmer ground.”

In that article I noted:

According to the IMF Germany’s stimulus amounted to 1.5% of GDP and France’s .07% of GDP. The article claimed that the U.S.’s stimulus amounted to 2% of our GDP but that is quite inaccurate. If you look at total commitments to spend, the U.S. pledged about $11.6 trillion (about equal to GDP) and had committed about $3.8 trillion at the time of the G20 meeting. So, if my math is correct, and assuming our GDP will be in the $13 trillion range in 2009, our stimulus was about 25% to 29% of GDP.

I may have been off on our stimulus commitments, but it is far more than 2%. The numbers are still coming in.  But the cool thing about Merkel's comments is that they were in response to the March 2009 G20 conference when Treasury Secretary Tim Geithner and Presidential Economic Advisor Larry Summers admonished the Europeans to engage in much larger fiscal stimulus efforts like the U.S. to synchronize a worldwide recovery. She was under a lot of pressure from the Social Democrats at home to do more stimulus.

In October 2009, Merkel's party, the Christian Democratic Union (CDU), a center-right party, with its political ally, the Free Democratic Party (FDP) and another Bavarian party, won the Bundestag (lower house) elections. The FDP are my kind of people, and they came in on a platform of lower taxes and cutting government spending.

With regard to the election, I wrote:

Germany is my lab experiment for the failure of Keynesian fiscal policies. If Germany recovers first as I think it will, then I suggest we fire Larry Summers and Tim Geithner and hire Mr. Solms to implement the German model instead of following Japan down the drain.


She suggested that the prevailing economic theory on stimulus—that increased deficit spending promotes growth— doesn’t apply in Germany.

In the June G20 meeting this summer, Merkel was again pressured by President Obama to not withdraw stimulus for fear that things would continue to sink worldwide. Merkel was unimpressed:

Continuing to run big deficits could backfire here, she said, because of Germans’ angst over their aging society and rising public debt. Fear that the German welfare state could run out of money leads individuals to save their income as a precaution, she said. If Germany cuts its budget deficit instead, “then the citizen is more willing to spend money,” she said, “because he knows that he can count on the pension, health and elderly-care systems.”

Germany is the world’s fourth largest economy, they are successful manufacturers and exporters, and their government’s deficit as a percentage of GDP in 2010 is expected to be about 5.5% versus about 10.1% in the U.S. Their fiscal stimulus was largely in the form of tax cuts rather than government spending.

Read it and weep all you Keynesians (from today's WSJ):

Germany's economy is set to grow 3.4% this year as its recovery continues across almost all sectors, the government said Thursday in its updated forecast for this year. The growth forecast for 2011 is a more modest 1.8%.

 

The government's previous forecast in April predicted 1.4% growth this year, before Europe's largest economy posted a blistering 9% annualized rate of growth in the second quarter and other indicators, such as unemployment rates and business confidence, continued to suggest a more rapid rate of recovery.

 

"After a period in the on-ramp, our economy is now driving in the fast lane," Economics Minister Rainer Brüderle said. ...

 

Mr. Brüderle said the recovery is being led by demand for German products abroad—particularly from China and India—as well as more recent signs of improved domestic demand. "The recovery has reached nearly all sectors of the economy and is gaining force," Mr. Brüderle said. He added that Germany will likely grow at around 2% annually over the next five years. ...

 

Unemployment, in turn, is dropping. The government projects that 3.2 million Germans will be out of work at the end of this year, with the total falling to 2.9 million next year. Mr. Brüderle said the total could fall below three million by the end of 2010.