Why won’t Germany understand austerity is killing Europe?

A growing number of economists are warning that too much fiscal tightening is making things worse



German leaders are looking increasingly like loners in their insistence that austerity is the sole cure for the eurozone’s ailing economies. Chancellor Angela Merkel and Bundesbank Governor Jens Weidmann continue to maintain that the only way for Greece, Italy, Spain and Portugal to fix their finances and calm investors’ nerves is higher taxes and spending cuts. But scores of prominent economists have been arguing that too much of that medicine risks killing the patient. Their warnings are becoming more and more dire.

Nouriel Roubini, aka Dr. Doom, was frantically waving red flags from the (web) pages of Slate last week:

“(…) the recession [in Europe] will worsen throughout this year, for many reasons.
First, front-loaded fiscal austerity—however necessary—is accelerating the contraction, as higher taxes and lower government spending and transfer payments reduce disposable income and aggregate demand. Moreover, as the recession deepens, resulting in even wider fiscal deficits, another round of austerity will be needed. And now, thanks to the fiscal compact, even the eurozone’s core will be forced into front-loaded recessionary austerity.

Moreover, while über-competitive Germany can withstand a euro at—or even stronger than—$1.30, for the eurozone’s periphery, where unit labor costs rose 30 percent to 40 percent during the last decade, the value of the exchange rate would have to fall to parity with the U.S. dollar to restore competitiveness and external balance. After all, with painful deleveraging—spending less and saving more to reduce debts—depressing domestic private and public demand, the only hope of restoring growth is an improvement in the trade balance, which requires a much weaker euro.

A bit further down, he delivers the punchline:

“The trouble is that the eurozone has an austerity strategy but no growth strategy. And, without that, all it has is a recession strategy that makes austerity and reform self-defeating, because, if output continues to contract, deficit and debt ratios will continue to rise to unsustainable levels. Moreover, the social and political backlash eventually will become overwhelming.” 

Paul Krugman fired his own warning shot the very same day, with a column titled “Europe’s economic suicide.” Speaking about European leaders’ handling of Spain’s ballooning debt, he writes:

“(…) the prescription coming from Berlin and Frankfurt is, you guessed it, even more fiscal austerity.

This is, not to mince words, just insane. Europe has had several years of experience with harsh austerity programs, and the results are exactly what students of history told you would happen: such programs push depressed economies even deeper into depression. And because investors look at the state of a nation’s economy when assessing its ability to repay debt, austerity programs haven’t even worked as a way to reduce borrowing costs.”

Compare that with this interview in Der Spiegel with Weidmann, where he carefully dodges the question of how exactly Greece is supposed to find a way to grow its economy if all it has to work with is austerity:

SPIEGEL: “Greece is in the fifth year of a recession, with no sign of a recovery in sight. Where is the much-needed economic growth supposed to come from?”

Weidmann: “We now know that Greece will have to completely reposition its economy. This is only possible if there are comprehensive reforms of the private and public sectors. All of this requires time. An honest assessment of the situation also entails facing up to the fact that Greece won’t be able to stand on its own two feet again overnight.”


Why won’t Germany understand austerity is killing Europe?

  1. This one line sums it up perfectly.

     “The trouble is that the eurozone has an austerity strategy but no growth strategy”

    The only way out of this situation is to grow out of it….something we all need to do. Austerity alone is just making things worse.

    • Paul Krugman refers to this as Medievalnomics: “austerity-loving pundits and policy makers really are like medieval doctors who believed in treating illness by bleeding their patients, making the patients even sicker, leading to more bleeding.”

      S&P downgraded many European countries because it believes this policy is “self-defeating”: “we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.”

      German influence is also killing the Eurozone economy because they are inflation hawks and have been running $200B trade surpluses (current account: 6%+ GDP). Like Krugman and others say, we have to trade with another planet if the economic “cure” is for every country to run a massive trade surplus.

      As for the reason why: conservative government.

      Bleeding the Patient

      •   LOL ‘Medievalnomics’….I like that!

        Yeah, a medieval solution in the 21st century….no sense to it at all.

        And Germany is an inflation hawk because they remember the terrible inflation just before the war

        All old memories….and real at the time….but wow I wish we’d move along the time-line  a lot faster!

        • Yes, just like the old memories of the single data point that is the pre-WW2 era to justify a distorted version of Keynesianism.

          I wish they’d move with the times.

      • Every German government, from the left to the right, have been inflation hawks. In Germany, the hyperinflation of the 1920s, not the Great Depression (which they translate to something like “the world economic crisis”, ie. not the GERMAN economic crisis) is the economic apocalypse most emphasized in history-books.

  2. So once government spending rises, even if it is to unsustainable levels, there can never be any corrections or cuts to bring it back down to a sustainable level because that would break the economy.   Instead you have to keep borrowing money until debt levels ensure that you are spending most of your GDP on interest, because that will cause economic growth eventually. 

    Makes perfect sense.

    • Stop putting words in other people’s mouths. Who said never?
      If you’d actually read the article, they said it’s too much.

      Much of Greece’s problems could have been handled simply by enforcing its tax codes.. at least, they could have until the politicians caved to the financiers.

      •  Two things about your latter paragraph.

        1) You shouldn’t be so dependant on your financiers that they can dictate terms.

        2)  It is a lot easier to enforce your tax codes if you give some incentives to pay taxes.

    • Nonsense. We didn’t fully recover from the Great Depression until WW2 began, which got the economy going again. Keynes had been calling for deeper stimulus spending all long: he got it when WW2 started. This caused debt/GDP to break 100% debt/GDP by the end of the war.

      In the post-war era, with expansionary fiscal and monetary policy we were able to pay down debt to 17% by 1973 (by running small surpluses/deficits counter-cyclical to the economic cycle.) During this time modern living standards were created in first-world nations which were unprecedented in human history.

      Over the past 30 years there was a free-market counter-revolution to the post-war Keynesian revolution founded on reckless tax cuts (that only benefited the wealthy), spending cuts, free-trade and carefree deregulation (that ended in a second global economic meltdown.) One would think the continuous cuts to spending would cause debt to go down, but it has skyrocketed over this period: to 84% in Canada and 102% in the US. Not only that, we have accumulated a massive infrastructure deficit of about $125B with these *cheaponomics.*

      People make a big mistake when they crudely equate national finances with household finances. 

      • I think your general point is right, though there are some caveats. Stimulus alone doesn’t solve debt problems – you do need to have austerity eventually, and it is painful eventually. The US economy had mostly recovered by 1937, when FDR started to cut spending. Similarly, there was austerity after the end of WWII, and that too resulted in a downturn (although because wartime controls and rationing was being dialed back people didn’t feel the pain as much). 

        The point of a stimulus should be to prevent the economy from a situation of cascading bank failures, or snowballing unemployment. It won’t work as an indefinite policy, and in general stimuli are less effective due to the presence of more leakages (eg. more international trade) than were present in the 1930s.

        Your depiction of the last 30 years as comprising of “spending cuts” is also woefully inaccurate. There were spending cuts in Canada and the US in the 90’s (and incidentally, fast growth) – but that’s about it. In the US under Bush non-defence spending increased faster than it had in decades.

        • I’m talking about cuts to social programs and public services. Reagan started off with big cuts. No doubt Mulroney could only dream of cuts that the Chretien Liberals would bring in, but he was cutting programs. Bush was cutting this kind of spending while fleecing taxpayers with crony-capitalist privatization no-bid-contract schemes. Under Harper spending went up 40%. He created a huge information-control bureaucracy, with 35,000 new public servants doing nothing of use to taxpayers. Now he’s cutting 20,000 front-line jobs that serve and protect Canadians. 

          Over this time period we amassed a $125B infrastructure deficit (in the US, 10X that amount.) Guess will have to wait to the bridges are falling down before we take notice. So basically there has been 25 years of fiscal irresponsibility: cutting spending on necessary things, wasting spending on useless things plus continuous absurd tax cut schemes (Reaganomics.) Add it all up and you get WW2 levels of debt — hundreds of billions of dollars wasted on nothing.

          Ironically, countries in northern Europe that spend the most on public benefits have among the lowest public debts: Nordic countries (except Iceland) have less than 50% debt/GDP.

          •  Tommy Douglas rapidly increased social programs without running a deficit financing either.

            You can have a big nanny state government that rules over all aspects of its citizens lives, or you can have a smaller government that leaves people alone.  Either way though, you have to pay for it.   What I object to is the idea that you keep spending regardless of your nation’s ability to do so sustainably simply on the idea that any cuts will “wreck the economy”.

            But the idea that every time there is a dip in the economy or a market correction that you simply increase spending all the time then you are simply a slave to an over-simplified model of economics.

            There are a lot of differences between the economy in the Great Depression and the economy now.   Nations didn’t have the huge amounts of debt as they do now.   The economy was based much more on resources and manufacturing and the vast majority of the population were rural.  You could also send thousands of men to build the Hoover dam without safety concerns, environmental assessments, or even law and order in the work camp.

            Finally, and most importantly, people didn’t have the huge amount of household debt.  People aren’t avoiding spending or investments because there is a liquidity trap in the banks, it is because people are realizing how precarious their situation is and are trying to pay off as much debt as possible before interest rates go up (and they will).

  3. I can however, get behind the idea that you need some sort of growth strategy, but can we please stop acting like increased spending is always the cure for every economic ill?   That isn’t even Keynesianism, it is just stupidity.

    But yes there has to be a strategy for growth to replace the money that was being put into the economy from borrowing and public spending.  Some of that will require some amount of public spending, but this public spending should be on specific and carefully considered infrastructure renewal, government backed research, and investment in higher education, not simply spending on whatever gets the money out the door the quickest.

    • Who says the cure for every economic ill is increased spending? Keynes believe in using the government budget as a counter-weight to the chaotic boom-to-bust business cycle. This normally means running small deficits and surpluses. But it also means going deep when the economy is in a state of depression and gradually paying it down after securing a solid recovery.

      Keynes called for deeper stimulus spending during the Great Depression. He turned out to be right. Krugman is similarly calling for deeper stimulus now (in the US, at least.) 

      Of course the issue here isn’t increasing spending, it’s the ill-effects of austerity on economies that are having growth recessions and are stuck in liquidity traps. Even at rock-bottom interest rates people and businesses are holding onto their money: they are not spending and investing. This is clearly causing the economy to suffer.

      There is also the possibility that the tight-money inflation target of 2% is causing “opportunistic disinflation”: that is, savers benefiting to the detriment to economy. The fact is the 2000s was the worst decade for GDP growth in Canada and America since the 1930s, despite a fake housing and finance boom that eventually triggered a global economic collapse.

      If savers want a decent rate of return on guaranteed bonds they will have to wait until the economy fully recovers. Austerity will not accomplish that.

      •  We are also in a time of record household debt.  Stop destroying people’s lives and families by trying to convince them to spend more and take on more debt.

        • Please.

          BTW, where do you think the high debt comes from? People are buying houses on speculation believing the prices will continue to go up. That’s what happened in the US when they reached the debt levels we have now. Banks are also giving out $50K in credit card debt to anyone with a pulse. Who’s to blame for this?

          Do we allow people to write their own pain medication prescriptions? No. Why not? We don’t expect them to be as responsible as doctors. So why are banks loaning all this money to people who can’t afford it? Because they believe taxpayers will bail them out if the system crashes. (Heads they win, tails taxpayers lose.)

          Therefore, this is a problem that needs an activist role from government to ensure people are not getting in over their heads and that banks will pay serious consequences if they mess up. (Like in Sweden where failed banks were nationalized in the 1990s. In America, the government wrote them a blank check for $800B in 2008; in Canada, Harper doled out $75B to banks, plus a $200B low-interest line of credit.)

          • Good, then you agree that you can’t use government policy to encourage people to spend or take on debt.

            This of course was the opposite of government policy in the US before 2008, where they used Fannie Mae and other places to encourage irresponsible loans.

            I could get behind banks that need to be bailed out being carved up and sold off (I’m not sure if nationalizing punishes anyone or really corrects the culture of the instititution).

          • The financial market meltdown in the US was the result of private predatory sub-prime mortgage lending, those junk mortgages being bundled up and sold as securities to “muppets.” There were other fraudulent financial innovation scams that fooled bond rating agencies and investors about the actual risk. All of this was caused by banking deregulation and an unregulated shadow banking sector. In the end, investors and taxpayers were defrauded of trillions of dollars. 

            It is ridiculous to claim all this was caused by publicly-run Fannie Mae and Freddie Mac. If one is looking to be informed on the subject, some good documentaries are “Inside Job” and the Fifth Estate’s “House of Cards.”

          •  So we’re not in agreement that you shouldn’t use government policy to encourage people to spend more than they can afford?

  4. Fascinating dilemma. I am anglo, and it makes me twitchy to praise the germans, but they have admirable control of their public finances. 

    I don’t agree with German solution – Greece and Spain are suffering significantly more now than North Americans did during great depression or the 1970s – but I can understand why Germans think the way they do. At some point, countries need to get their finances under control and stop spending wildly or these bailouts will be constantly needed.  

    Look at recent German history – West Germany had to absorb East Germany and that was expensive – and Germans suffered in late 1990s, early 2000s while everyone else went on credit spending sprees. Housing prices are low in Germany, Germans had their wages basically frozen for almost a decade while companies piled up huge profits to pay for unification and lend to Southern Med countries. Germans are not going to be very sympathetic to complaints about austerity when the Germans went through austere times while everyone else was partying.

  5. Of course the people must pay for the sins of bankers. It’s how the world
    works. Cannon fodder for The Economy. Who could be against that ?

    • I was largely against bailing out the banks too, until I learned that governments made money on the bail out.   Not that it excuses their role in whole mess mind you, but the bankers can’t carry the whole blame for the economic mess, nor can “the people” be entirely excused from their sins that led to their economic problems.

      •  The bailouts themselves don’t begin to cover the damage that was done to the economy as a result of the dubious practices of the big banks. The lost wealth due to the recession is in the range of tens of trillions of dollars. We are still paying for the sins of the bankers, and will probably continue to do so for some more years yet.

        • We are paying the sins of everyone, including the fact that populace remains content to be economically illiterate, and doesn’t want to learn how to properly invest.   Instead, they leave it to fund managers, who may or may not know what they are doing.

          You know how Milton Friedman describes the 4 ways money is spent?  It is a criticism of the public service, but it also describes investment firms and banks very well.  
          “I can spend somebody else’s money on myself. And if I spend somebody
          else’s money on myself, then I’m sure going to have a good lunch!””I can spend somebody else’s money on somebody else. And if I spend
          somebody else’s money on somebody else, I’m not concerned about how
          much it is, and I’m not concerned about what I get.”

          People have to understand that when they hand money over to “experts” to invest their money, these principles are very much in play and will surely come to bite you in the bottom.

    •  Bankers have nothing to do with the problems in Greece, Spain, Portugal and Italy.  Ireland’s problems were caused by bankers.  The other countries have been brought down by unsustainable government debt.  They ran out of people willing to lend them money when it became clear the money would never be repaid.

      • Sorry, but ….


        Every country has its’ own story. Even poor benighted Greece. They only
        got into the Euro because everyone wanted them in and Goldman Sachs
        helped them do some jiggery pokery shell game with their finances so that
        there could be a wink – nudge for their admittance. Then the bankers lined
        up and told them to “take our money, please” because everyone assumed
        the Euro made them indestructible.

        • Nice little story, it would fit in well with most other fairy tales.

          Please, no links to Krugman, I just ate. Krugman manages to contradict himself at least once in every column.

  6. Why won’t Germany understand austerity is killing Europe?

    Daily Telegraph, April 2 2012:

    Yet, for all the rhetoric, little has changed. The austerity strategy imposed by Berlin on Europe’s `Arc of Depression’ – against the better judgement of the European Commission, the OECD, International Monetary Fund, and informed economic opinion across the globe – has not been modified in the slightest even though economic contraction has proved deeper than expected in every single victim country.

    Mr Schäuble talks of reducing debt in a “growth-friendly manner” but that is exactly what he forbids. He has embraced to the Puritan doctrine of “expansionary fiscal contraction” taught in German universities – but almost nowhere else in the world – which in its extreme form posits that a return to fiscal probity brings its own reward, even without the cushion of devaluation and monetary stimulus.

    • “Expansionary fiscal contraction” is a neo-con-job. It was created by free-market economists whose only interest is to destroy post-war centrist government (like social programs and public benefits.) If it brings about economic ruin all the better: that will force even deeper cuts! (That is, unless it causes a political uprising, like in the 1930s, which eventually led to implementing centrist Keynesian policies that created modern living standards.)

  7. Eventually, I’m sure this conversation will get around to growth. Maybe, sometime….

  8. Austerity is not killing Europe.  Debt is killing Europe.  Because they never did anything about the problem before, the consequences are grave now.  Hopefully the US is learning.

  9. Growth is not possible if Greece goes bankrupt.  Greece would be bankrupt already if not for bailouts.  Greece was hardly growing before.  Debt is the problem, not austerity.  So they can either go for austerity or they can go for bankruptcy. 

    The whole idea that there is some magical path to economic growth if they were allowed to keep running up debt is absurd.  For one thing, nobody would be willing to lend the money, knowing the money would never be returned.  But even if they managed to find enough patsies out there, this would only buy time until the next crisis, at which time you’d be writing another article about austerity.

    Whether they should simply declare bankruptcy instead of austerity, or whether they should exit the euro and let currency devaluation eliminate their debts, that is another story.

    But growth is simply out of the question at this point.

    •  You can’t pay off debt if you have no growth, because you’ll have no money to pay it off with.

      Growth is never out of the question, but you have to get at it.

      Bankruptcy or exiting the EU won’t help the Greek people either

      • Your strength in economic theory is dazzling.

        It appears to be:
        1. you need more debt to pay debt.
        2. you can make more money by wishing it so.

        I hope you don’t manage your own finances.

  10. From the standpoint of Germany, things are going well. German unemployment rates are LOWER now than at any point in 20 years – down about 6% from roughly the time Merkel took office. Should we be surprised that, after centralizing policymaking power in Germany, Europe has the fiscal strategy that works best for Germany?

    The Eurozone simply does not work. You have a monetary union, but no fiscal union. The results are unsurprising (and similar to the interwar Gold Standard). Eternal bailouts are not politically viable, particularly when much of the reason the PIIGS countries need bailouts is the result of their own profligacy and corruption.

    As I see it, the Eurozone faces a choice. If they want to continue, they need to integrate more. Voters in Germany will be more willing to accept bailouts if they know that the kind of runaway spending that characterized Greece over the past decades is impossible. Alternately, the Eurozone can shrink itself to a smaller group of Northern European countries. The latter would, incidentally, be terrible for debt-ridden PIIGS countries, who would have to pay Euro-denominated debt with their own likely-to-be worthless local currency. But sometimes you have to cut off gangrenous limbs before the disease spreads.

    Either way, the British euroskeptics everybody mocked for rejecting the “European idea” look pretty smart these days.

  11. Germany doesn’t understand that austerity is killing Europe because austerity isn’t killing Germany. At least not yet. 

    Germany has had a better balance of trade with China than most Western countries because China imports German precision machinery to make the products that they sell so cheapy in Canada and the U.S. 

    Not to worry. Eventually, the Chinese will learn how to manufacture the precision machines themselves, and the Germans will be without a market. 

  12. Europe is like the school bus driver who didn’t pick up the children en route to school because he was running late.IT’S THE PEOPLE STUPID !!

  13. If only things were so simple! The sovereign debt crisis deserves to be taken more seriously. You describe your witnesses as “frantically waving red flags” or “firing warning shots.” Hardly a sign of seriousness.

    In addressing the German Parliament on February 27, Chancellor Merkel reiterated that austerity is only part of the solution to the current crisis. At the same time, it is necessary to raise competitiveness and economical growth. To this end, the European Council (of EU heads of state and government, including the Chancellor) agreed in January 2012 on special measures to reduce youth unemployment. Funding is made available through the structural funds of the EU, to which Germany contributes about 25%. And already in March 2011, acting on a Franco-German initiative, the EU adopted the “Euro-Plus Pact” not only containing measures to reinforce financial stability but explicitly to foster competitiveness and employment.

    The EU is based on solidarity. Because of that, Germany contributes 379 billion Euros (roughly CAD 490 billion), mostly as guarantees, to the two Euro stability mechanism EFSM and ESM (by comparison, the 2012/2013 Canadian budget foresees a total revenue of just CAD 255 billion). But no matter how much non-European economists will suggest to reduce “uber-competitiveness,” the EU will not go down this path. To the contrary: the measures adopted and well under way will, over time, lead to more productivity in all of the EU member states. They will, therefore, stimulate growth, employment and competitiveness also in the countries currently suffering most from the sovereign debt crisis.

  14. The huge 50% youth unemployment in Spain can be significantly reduced by initiating a massive agricultural program that should operate a minimum of 2 -3 years. 
    Learning the basics of agriculture will give youth a valuable appreciation of Spanish lands and its farming communities.

    Set up a youth workforce [directed centrally and managed locally] to enhance Spanish crop production and exports. Pay the workforce based on crop output proceeds at harvest. Room and board facilities would be provided and slight draws for incidental living expenses would be paid weekly, eg cell phones. Wifi should be provided for work and leisure hours.

    This workforce should farm every square meter of usable land. Add Leases on private land and use available government land.

    Install temporary housing for workers, temporary roads for travel and delivery, and permanent  solar fields to operate water pumps for irrigation. 

    These farms can be managed by experienced farmers and the mature/more advanced youth. Promote the smartest people quarterly or sooner – they can motivate and train along with the experienced farmers, most of whom need to be tending their own fields.

    Grow 2 crops of high quality fruits and vegetables – sell at market and freeze excess. But only focus on export.

    The time is now! The youth of Spain is the future of Spain. 

  15. Germany and IMF causing pre-meditated genocide in Greece. People in Greece are literally dying due to starvation. Little children walking around with projected stomachs in Athens and people literally falling down dead in the streets due to starvation. And before anybody says anything, I live there and I am documenting this imagery and writing about all that my eyes are seeing. This is really happening, people literally falling dead in the streets and volunteers with spades picking them up and throwing corpses into garbage bins or lorries which come every two-three days to pick up the corpses. This is what is really happening in Greece. And all this so that Germany can create another Weimar in the Mediterranean and so that they can get their hands on oil and gas in Greece and Oil and gold in Spain and of course killing people – the genocide of the Greek people just to save the banks. Wake up everybody, this is what is really happening in Greece.

  16. Germany now also intervening in Italian internal affairs after Grillo won a substantial part of the vote and it is very plain to see that Germany for the third time in their bloodfilled history are casuing genocide in Europe. Germany is killing Europe. Europe must declare war on Germany and its people and they shoule never ever ever be allowed to be independent or a free nation. How much more evidence does one need that Germany are the purposeful indoctrinated killing machine of Europe.
    One only has to walk through the streets of Athens to see littel children, grown-ups, the elderley literally dying in the streets from starvation – this is what Germany is doing.