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

While 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.