Legal Analysis and Commentary from Justia

Germany’s Election Results Are Bad News for the U.S.

German EconomicsWhile we wait to see how much damage Republicans in the House of Representatives are willing to inflict on America and the world—all in the pursuit of preventing millions of uninsured people from having access to affordable health care—the rest of the world is dealing with its own political dramas.  Among the wealthier countries, none are so unfortunate as to have been taken over by Tea Party-like zealotry, but there are certainly danger signs in political developments in various countries.

One unusual danger sign arose from the German national elections, which took place last week.  I say “unusual” because the result there—the reelection of a quiet, consensus-building incumbent—would hardly seem to be a cause for worry.  Even so, Chancellor Angela Merkel’s near-majority victory portends serious trouble for Europe, the United States, and the world.

Merkel is so low-key that most Americans have probably never heard of her.  Indeed, those who do know her name probably remember her best from the unfortunate incident in 2006 when former President George W. Bush tried to give her a surprise neck-rub at a global summit meeting.  After that embarrassing moment of frat-boy-meets-serious-adult, Merkel disappeared from view in this country.  While it is hardly unusual for people in the U.S. to ignore foreign affairs, it is rather striking that Merkel can remain so invisible, when she wields so much influence.

In fact, Merkel’s influence is so significant, and so negative, that her reelection portends bad economic tidings for Europe, the U.S., and the world.  Even if the United States survives its current political showdown, Merkel is set to keep grinding down the European economy, to everyone’s detriment.

The Roots of German Austerity, and the Case for Changing Course

The central problem with Merkel’s leadership, of course, is her fierce commitment to putting out fires with gasoline.  That is, during Merkel’s two terms as Chancellor, Germany has led the way in forcing European countries to ignore the overwhelming weight of eighty years of economic theory and evidence.  At Merkel’s insistence, Germany’s and Europe’s response to the worst global downturn since the Great Recession has been to impose austerity programs on the most vulnerable people in Europe.

How bad has it become?  Unemployment rates in some of the largest economies in Europe have been above 25% for several years, and rates among young people have topped 50%.  That means that half of some countries’ young people are unable to find work, making it impossible for them to begin to contribute to their countries’ rebuilding processes, much less to build the foundations for happy, successful lives.  Of course, keeping these young people unemployed only makes matters worse, as those people will not add to their nation’s incomes, or pay taxes, or be able to reduce their reliance on ever-shrinking social safety nets.

The problem, of course, might not be Angela Merkel herself.  She might merely be a symptom of a larger problem in the German political system, and ultimately in the attitudes of Germany’s opinion leaders.  (I have no way of knowing whether typical Germans are fully on board with the austerity doctrine, or instead are being manipulated by their leaders.  Therefore, I will not attribute the problem here to the fundamental attitudes of the German people.)

Why would Germany’s political culture be so deeply committed to inflicting needless pain on vulnerable people?  It seems difficult to explain, especially because the German political system has been at such great pains in the post-World War II era to show that it is a positive force for good in the world.  It can, therefore, hardly be comforting to German leaders to see protests in other European countries, with people openly invoking comparisons between Germany today and Germany’s horrific 20th Century extremism.  If anything, one might imagine that German leaders would bend over backward to avoid the appearance of imposing their iron will on other Europeans.

Even so, an even deeper fear appears to run through Germany’s leaders, based on their country’s experience with hyperinflation in the 1920’s—the years that led to the rise of Adolph Hitler and the Nazi Party.  The lesson that modern German politicians have drawn from that experience is that “sound finance” must always rule the day, and that any flirtation with even the lowest levels of inflation is cause for alarm.

That attitude has been baked into the structures of the European Union and the broader project of economically integrating the continent.  Whereas the central bank in the United States, the Federal Reserve, has broad powers and legal mandates to pursue both price stability and full employment, Germany’s leaders have ensured that the European Central Bank (ECB) has only one goal, to fight inflation.  The ECB, moreover, has shown little sign that it is interested in expanding its role, even in the midst of an ongoing crisis.

 

The shame of this situation is that Germany’s leaders learned the wrong lesson from the rise of Hitler.  The era between the World Wars did see a ruinous German hyperinflation, but that catastrophe was preceded by (and largely caused by) the imposition of severe austerity on the vanquished German nation after World War I.  The victorious allies extracted such extreme economic penalties from the defeated Germans that they set in motion an economic disaster that led to high unemployment, a collapsing German economy, and the creation of a perfectly awful incubator for social and political extremism.

For some reason, however, the political and economic elites in Germany have long since concluded that it was the inflation, but not the austerity or the inevitable mass unemployment that accompanied it, that was the real problem that led to the Third Reich.  German politicians are therefore quick to announce their fealty to fiscal “responsibility.”

The Reality of Germany’s Economic Success: Thriving on the Backs of Struggling Neighbors

German leaders point proudly to their 5.3% unemployment rate, saying that if the German people can be prudent and succeed, so should other countries.  Although the mythology of fiscal rectitude runs deep in discussions of German and European political decisions these days, it is worth noting a few pertinent, contradictory facts.

Most importantly, Germany’s economic system maintains a very strong social safety net, in that jobs are protected even when the economy is weak.  German growth in gross domestic product (GDP) has, in fact, not been better than that in the United States and the United Kingdom over the last ten years or so.  Last year, German growth was anemic, much lower than in the US and the UK.

Therefore, the relative comfort of German workers is not simply based on an unfettered market in which an austere national government allows the chips to fall where they may.  Prosperity in Germany is very much a planned project, with the central government playing an essential role in keeping its citizens happy and secure.  Lecturing other countries about the need to let their poorest citizens face the harsh winds of reality is unbecoming of Germany’s leaders, but they seem to relish doing so.

Moreover, even the raw numbers on government debt do not back up the idea that Germany is somehow more fiscally pure than everyone else.  The ratio of net government debt to GDP in Germany stood at almost 83% last year, which was actually higher than in the United States, which is supposedly “addicted to spending,” according to Republicans.   (International data comparisons are imperfect, but no matter what apples-to-apples comparison one makes, Germany and the U.S. have similar levels of debt.)

Therefore, the self-congratulatory tale of German prudence and willingness to live by the dictates of the free market is a dangerous myth.  It is not merely hypocrisy that undermines the credibility of Merkel and other German leaders, however.  It is that the very basis of their success is the exploitation of the weakness of their poorer neighbors.

If there were no euro, and instead we still lived in a world where each European nation maintained its own currency, those countries with weaker economies would see their currencies weaken.  Accordingly, stronger economies would have stronger currencies.

Although people often talk about how important it is for a country to have a strong currency, the economic fact is that weaker currencies allow countries to export more goods.  This means that, without the euro, Germany’s goods would be less competitive internationally, and poorer countries would be able to export their way out of depression.

And all of this would be through the invisible hand of the currency markets, not through government intervention.  Because of the euro, however, poorer countries are stuck with the same currency as their richer neighbors.

Therefore, Germany’s export-led prosperity is not only not replicable everywhere (because it is impossible for all countries to be exporters, with no one willing to import other nations’ goods), but it is based on having a currency that is weaker precisely because of the weakness of the countries that German leaders disparage.  And that weakness among its poorer neighbors, of course, is reinforced by Germany’s insistence on austerity policies elsewhere.

The moralism dripping from pronouncements by Angela Merkel and other German leaders, therefore, is especially galling because Germany’s relative prosperity is predicated on the continued struggles of the countries that are supposedly too weak-willed to follow the German example.

Will Merkel Lead in a New Direction?  It Seems Unlikely

It is possible, one supposes, that Chancellor Merkel is aware of all of this, and she is hoping to be a transformative leader in her third (and presumably final) term.  Perhaps she has been merely hamstrung by the broader political culture of her country, and has bitten her tongue while hoping to find a path toward a more humane approach to governing Germany and leading Europe.

Certainly, Merkel’s background offers some hope that she is not the orthodox thinker she appears to be.  Having been raised in the eastern part of Germany, she certainly has seen how much direct government effort it takes to turn a poor, backward nation into part of a modern, prosperous one.  Merkel could be the kind of leader that Pope Francis now appears to be, a long-time devotee of orthodoxy who is suddenly able to see a better path.

There is, however, little evidence that Merkel sees anything wrong with the policy line that she has been pushing so enthusiastically for so long.  Indeed, she has shown herself to be more than willing to make a deeply misleading, disingenuous case for more austerity.

As one pro-business news source put it after Merkel’s electoral victory: “Merkel never tires of expounding on three big numbers: 7%, 25% and 50%. Europe, she notes frequently, has 7% of the world’s population and 25% of its total GDP. But it accounts for 50% of its social welfare spending. This, she says, is uncompetitive and unsustainable.”

If the mantra of 7/25/50 is not quite as inane as former Republican Presidential candidate Herman Cain’s “6/6/6” tax plan, it is not for lack of trying.  Merkel simply puts together three numbers that have nothing to do with each other.  Of course the second number is higher than the first, because Europe includes some of the largest, advanced economies in the world.  With the UK, France, Germany, Italy, and Spain, along with the smaller prosperous countries of northern Europe and Scandinavia, Europe could not help but have a larger percentage of world GDP than population.

More scandalously, Merkel’s favorite formulation somehow suggests that Europe’s share of total global social spending is somehow a meaningful number.  With a global economy that includes Africa, South America, India, China, and the rest of Asia, why would anyone imagine that Europe’s social spending would be proportional to its share of GDP?  Moreover, how could the fact that Europe has 25% of GDP and 50% of social spending tell us anything about whether European social spending is “sustainable”?

Even the United States has a much smaller welfare state than Europe’s.  If sustainability and competitiveness were driven by the size of a country’s welfare state, especially when measured in the meaningless way that Merkel measures it, the U.S. should have shot past Europe long ago.  Yet, even controlling for the effects of the Great Recession, the United States is at best on an even footing economically with Germany and Europe.

It is this kind of brazen dishonesty on Merkel’s part that raises the greatest concerns about her continued global influence.  The United States, for all of its political dysfunction, has thus far managed to avoid being pulled down by the extreme, Merkel-led disaster that we see in much of Europe today.  When our next crisis comes (perhaps soon), we will need open-minded leaders in Europe who are able to overcome orthodox thinking.  Angela Merkel is not only committed to that orthodoxy, but she is also uniquely dishonest in her political marketing of the austerity that she forces on the rest of Europe.  That is bad news for everyone.

Neil H. BuchananNeil H. Buchanan, a Justia columnist, is an economist and legal scholar, a Professor of Law at The George Washington University, and a Senior Fellow at the Taxation Law and Policy Research Institute, Monash University (Melbourne, Australia). He blogs at DorfonLaw.org, and he is the author of The Debt Ceiling Disasters: How the Republicans Created an Unnecessary Constitutional Crisis and How the Democrats Can Fight Back.
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  • Chriss Street

    To understand Merkel, watch the Dutch: Published in American Thinker: Europe Declares the Welfare State Dead

    With Congress and the Administration in full battle mode over Obamacare to convert the United States into a European welfare state, Dutch King Willem-Alexander gave a nationally televised speech on September 16th declaring the European welfare state dead. The message, written by the Dutch government, acknowledged current state spending for unemployment benefits and subsidized health care are unsustainable. With Moody’s credit rating agency threatening to downgrade Dutch debt, the King announced citizens soon
    will be expected to create their own social and financial safety nets with much
    less help from the state.

    Economists define a welfare state when 20% of a nation’s GDP is spent on welfare and education. America has never hit that level, but welfare and education spending rose to 19.4% of GDP in 2012. Implementing Obamacare will convert America into a welfare state for the first time in our history.

    The welfare state ensuring cradle to grave well-being for its population is uniquely a European creation. It originated in Germany and took root in Britain and Scandinavia during the Great Depression. The 1958 European Economic Community treaty legally required “promotion of employment, improved living and working conditions … proper social protection”. The 1993 Maastricht
    Treaty adopting the euro currency requires states provide high living standards and good working conditions.

    Historian Tony Judt stated the European social model “binds Europe together” in contrast to the “American way of life”, which sociologist and former communist Will Herberg defined as so individualistic “it stresses incessant activity on his part, for he is never to rest but is always to be striving to ‘get ahead.’”

    The objective of the welfare state is “limiting the reliance of family and market” through equality of opportunity and an equitable distribution of wealth. This requires income redistribution transfers to provide services and pay direct individual benefits. Hillary Clinton argues in “It Takes a Village” communities are
    superior to parents at raising children and Peter Lindert in “Growing Public” argues state “investments” contribute to economic growth.

    But according to a study by the Bruegel think-tank: “Europe suffers from a
    mutually reinforcing interaction between limited productivity gains, protracted
    deleveraging, weak banking sectors and distorted relative prices … This
    combination contributes to an overall weakening of economic growth and
    threatens to turn into self-perpetuating stagnation.” The report demonstrates 30 years ago European economic output was 15% higher than American, but by 2017 output will be 17% lower.

    International Monetary Fund warned on April 18th, Europe’s “structural unemployment” rate – unemployment that won’t go away even if the crisis ends – is expected average a staggering 10.1%, up from 7.4% when the European crisis began.

    Dutch and Germans’ Aaa credit ratings backstopped EU borrowings
    that rescued Portugal, Ireland, Italy, Greece and Spain from bankruptcy. But on July 23rd, Moody’s put Dutch and German premier credit ratings on negative
    credit watch, anticipating possible credit downgrades. Moody’s on September 3rd added stress by changing the credit outlook to negative for EU debt the Dutch and Germans guaranteed.

    King Willem-Alexander’s words are highly symbolic, since center-right
    and center-left European elites have resisted challenging the welfare state as the social contract between Europe’s rulers and those ruled. Massive state borrowing allowed Europeans to enjoy decades of lush welfare benefits without paying for full costs in taxes. But if the Dutch and Germans pull credit guarantees, many European welfare states will collapse like houses of cards.

    All of this should serve as a ringing endorsement of the “American way of life. But just at the moment of triumph for America’s market and family friendly economic model, the Obama Administration wants the United States bound together with collapsing European welfare states.

    • sarah

      I disagree especially with that last sentence. What all of this incessant chatter about welfare states and scary, run-away spending flagrantly fails to understand is increased spending on recovery and so-called entitlements is in direct response to the depression of 2007-2008, which are absolutely necessary for survival and eventual recovery. Let FDR and his 1930s initiatives inform as to how to manage economic devastation. I simply cannot understand how anyone could miss the centrality of such an historic and life altering event as an all-out depression.

  • sarah

    That was a great article. Germany’s austerity preachings are not only hypocritical, but they are also very sinister. It is kind of as though Germany is acting as the penultimate dual tracking banker of nations. Very interesting.

    • Hermann Hoffmann

      Sinister????? Are you ok? As a German I have to disagree with you and this article. I think, you and the author haven’t understood what the Euro is about. And you don’t have to, but please rethink describing Germany as acting sinister. I don’t want to start a discussion about the US NSA here, but I assume that many people would consider their behavior as sinister.

  • foo900

    What a load of BS.

    If Merkel is not known by the average US citizen, then it surely her fault?

    ‘That is, during Merkel’s two terms as Chancellor, Germany has led the way in forcing European countries to ignore the overwhelming weight of eighty years of economic theory and evidence’

    That is gross. The ‘economic theory and evidence’ has caused the global financial crisis. Merkel and others are working hard to contain the damage.

    ‘Why would Germany’s political culture be so deeply committed to inflicting needless pain on vulnerable people?’

    Even more BS. German political culture financed the survival of the Euro and the European Union. Just recently.

    ‘If anything, one might imagine that German leaders would bend over backward to avoid the appearance of imposing their iron will on other Europeans.’

    What? Germany invests BILLIONS to keeping these countries afloat. Nobody needs to ‘bend over’.

    ‘European Central Bank (ECB) has only one goal, to fight inflation’

    Not really. The ECB’s main task is to maintain the euro’s purchasing power.

    ‘Last year, German growth was anemic, much lower than in the US and the UK.’

    You are clearly not knowing what you are talking about. Germany had a growth of 0.7%. UK had 0.2%. Certainly 0.7% is not much lower than 0.2%.

    > government debt to GDP in Germany stood at almost 83%

    Ah, I think there was, wait, what was it? Ah, the German reunification which cost quite a bit and increased debt. If you look at current trends: the German government posts a budget surplus this year. How about the US and the UK???

    if you look at debt beyond government debt, it gets only worse…

    ‘Therefore, the self-congratulatory tale of German prudence and willingness to live by the dictates of the free market is a dangerous myth.’

    Not sure what country you are talking about, but Germany itself describes its economy as ‘social market economy’.

    ‘If there were no euro, and instead we still lived in a world where each European nation maintained its own currency, those countries with weaker economies would see their currencies weaken.’

    Again, you seem to know nothing about European economy. Before there was the Deutsche Mark. The European economies tried to keep their currencies in sync. Basically financial policy was made in Frankfurt and other European countries followed – without ability to influence German financial policy. You know what, Germany has an export surplus since several decades – long before the Euro appeared.

    > because it is impossible for all countries to be exporters, with no one willing to import other nations’ goods’

    Kindergarten economics. Germany imports huge amounts of goods. It has an export surplus, but that does not mean it does not import goods. Just the opposite. The more Germany exports, the more it imports. You might want to check the import/export numbers for Germany some time.

    > And that weakness among its poorer neighbors, of course, is reinforced by Germany’s insistence on austerity policies elsewhere

    Germany does not insist on austerity policies. It just does not give money to countries which are unwilling to reform for more competitiveness.

    > could not help but have a larger percentage of world GDP than population

    That’s not Merkel’s point. At all.

    > Moreover, how could the fact that Europe has 25% of GDP and 50% of social spending tell us anything about whether European social spending is “sustainable”?

    You might want to look at the context where she said it: European nations with huge amounts of debt and an aging population. It’s clear to everyone, but not you, that financing a such huge social system is a challenge. That was the point of the controversial reforms under Chancellor Schröder (the center-left Chancellor before Merkel, if you don’t know him).

    ‘The United States, for all of its political dysfunction, has thus far managed to avoid being pulled down by the extreme, Merkel-led disaster that we see in much of Europe today’

    The world-wide financial disaster is a product of the US. It is definitely not Merkel’s disaster. It belongs to Reagan/Clinton/Bush/Obama and the financial elite of the US.

    If we were to believe the US press of the past years, Europe would have no Euro anymore, various countries would have left the EU. The reality is that Germany and a few others are the stability anchors in Europe which have prevented this. Germany wants Europe to be able to compete globally. Just like Germany, which has a trade surplus even with China.

    Germany definitely does not want to follow the catastrophic economic policy of the US of the last two decades.

    • Kon

      Prof. Buchanan is in line with all the people who do not understand,
      that the crisis in Europe is a debt crisis. But you cannot fight debts with even more debts. At least not forever. At
      some point you have to make surpluses. Medicine might be disgusting – but still necessary.
      If people like Prof. Buchanan
      or “sarah” believe, that other countries should pay for countries that
      are self-inflicted hugely indebted, why don’t they suggest the U.S. to
      pay? According to Prof. Buchanan, the U.S.’s debt ratio is lower than
      the German. BTW: The German debt ratio of 83% is the best argument why
      Germany should not pay for other Countries. Germany cannot afford it!
      Nobody claims, that Germany is the perfect economy – but in contrast to other countries Germany undertook some very painful reforms. Chancellor Schröder even sacrificed the fortunes of his party, that never fully recovered from the protest of many of its followers. And yet everybody knows, that the reforms were necessary and in the end successful. So much to the German leaders.
      This
      article is arrogant towards the German people (Prof. Buchanan consideres them to be either selfish and ignorant of other people or just stupid) and – considered that
      Merkel, according to Forbes, is the most powerful woman in the world –
      arrogant toward the American people whom he suspects not to know
      Merkel. I hope this assertion is not a result of a survey he did at GW!

 

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