Extra spending doesn't fly with hawkish Germany

SPAIN, Italy and Greece are taking a knife to public spending because they have no choice. But Germany is still healthy enough that it could do its troubled trading partners a favour and focus more on promoting demand and less on cutting debt.

SPAIN, Italy and Greece are taking a knife to public spending because they have no choice. But Germany is still healthy enough that it could do its troubled trading partners a favour and focus more on promoting demand and less on cutting debt.

Could, but almost certainly will not. Even if German politicians had not made a balanced budget a constitutional obligation two years ago, there is a deep consensus among policymakers and economists that austerity and growth are not enemies: they are comrades.

Jens Weidmann, president of the Bundesbank, the German central bank, was channelling generations of hawkish predecessors last week when he called on the government of Chancellor Angela Merkel to speed up efforts to cut new borrowing close to zero.

"We must quickly achieve a structurally balanced budget," Dr Weidmann said in an interview with the Tagesspiegel newspaper. Germany should set an example for the rest of the beleaguered euro zone, he said.

The Bundesbank president speaks for a large swath of the German public, and his comments suggest that President Nicolas Sarkozy of France and Prime Minister Mario Monti of Italy should not expect more of a financial commitment when they meet Dr Merkel in Berlin this week. "One of the lessons of the crisis," Dr Weidmann said, is that cutting budget deficits "should be postponed as little as possible".

That view annoys many people outside Germany who see it as another example of the country's lecturing to the rest of Europe while putting a priority on its domestic interests. Germany, with the lowest borrowing costs and strongest economy, should lend the rest of Europe a hand, they say.

"Germany is the only country that has this freedom, and if they don't use this freedom, that is bad," said Eric Chaney, chief economist at AXA Group, a French insurer.

With interest rates on German bonds close to zero, Mr Chaney noted, shouldn't the country be using this cheap money to invest in education and infrastructure and stimulating demand around Europe?

"If Germany has a problem, it is the instability of the euro," he said.

Evidence of a coming downturn in the euro zone remains strong. Retail sales in the euro area fell nearly 1 per cent in November from October, according to data released on Friday, while unemployment remained at 10.3 per cent. The European Commission's confidence indicator fell last month for a 10th month in a row.

Despite the worsening circumstances, German fiscal policy is already set in stone. In 2009, the country adopted a constitutional "debt brake" that requires a nearly balanced national budget by 2016. Berlin can achieve that requirement only if it starts reducing deficit spending now.

One problem is that the benefits of government spending depend on whether politicians spend the money wisely. Better schools may promote long-term economic growth. Chauffeured limousines for members of the Italian parliament do not.

"Governments spend too much in good times, and they spend even more in bad times," said Dennis Snower, president of the Kiel Institute for the World Economy in Germany. "To have some constraints is a good idea."

Professor Snower believes the German debt brake is overly rigid, but that all euro-zone countries should have built-in limitations on spending. If Greece had such a law, he argued, it would improve investor confidence and perhaps even allow the country to avoid cutting social services in the middle of a brutal downturn.

Germany accounts for little more than a quarter of euro-zone output. While that is a lot, Professor Snower argued that it would be illusory to think that Germany could stimulate its economy enough to rescue Europe.

"You don't need Germany to do foolish things to help Europe because these countries can do things themselves," he said.

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