- The buildup: Germany suffered from a recession during the early 2000s in the aftermath of the dot-com bubble. The German government implemented reforms, which effectively led to a period of wage restraint. German companies became extremely competitive within the Eurozone. A high domestic savings rate combined with low domestic investment meant that Germany started to export capital to the rest of the world. A large part of these capital outflows went into Southern Europe and contributed to the economic boom and housing bubble, which would burst in 2008.
- In the aftermath of the global financial crisis the German government, just like many other governments around the world, implemented a fiscal stimulus package at first. However, it was quite small in terms of size relative to GDP and relative to the economic downturn in 2008/2009. Furthermore, the narrative changed quite rapidly when it became apparent that countries in Southern Europe faced a debt problem as a result of the economic downturn and bailing out the financial sector. The German government was one of the frontrunners in pushing for austerity policies in indebted Eurozone countries. Keynesian economists like Paul Krugman obviously warned well in advance that such policies would msot likely be counterproductive just as macroeconomic theory predicts. In fact, the IMF later estimated that governement multipliers in the Eurozone were well above 1 and maybe as high as 2. This implies that for every euro the government does not spend GDP contracts by as much as 2 euros because of lower total spending in the economy. Consequently, austerity policies actually increased debt to GDP ratios because the denominator decreased faster than the numerator. Ironically, higher public spending would have meant faster economic growth and debt to GDP ratios would be lower as a result.
- Despite the fact that monetary policy has been extremely contractionary in the beginning of the crisis and that the ECB has been undershooting its inflation target for many years in a row now, the German Bundesbank and the German government have repeatedly called for an end of Quantitative Easing and the zero interest rate policy. There is a consensus in modern macroeconomics that asset purchases have stabilized and contributed to the economic recovery in the U.S. GDP growth resumed and the Eurozone started to recover once the ECB finally started to implement its own program of QE almost 7 years after the financial crisis. Unemployment in the Eurozone has fallen for the first time in years below 10%, but there should be no doubt about the fact that Southern European countries still experience economic slack with excessive rates of unemployment. Monetary policy would have been even more contractionary and the recovery would have been even slower if the Bundesbank had the Bundesbank more weight in the decision-making process.
- When it comes to Greece, it was indeed obvious that there was a public debt problem and that the country would never be able to pay back its obligations in full. Excessive austerity that was imposed on the country has led to a contraction equal to more than a third of GDP over the last 10 years, thus exacerbating the debt problem. Many economists have argued that the country would benefit from a haircut on its debt, but Germany has refused this proposition. This is very ironic because Germany after World War II benefited hugely from debt forgiveness as well as an economic stimulus program called the Marshall plan. These are exactly the economic policies that would be needed for a recovery in Southern Europe, but the German government has been consistently pushing for counterproductive policies and even seems to be unwilling to acknowledge German economic history.
- Schäuble has made various comments on how the current zero interest rate policy is disappropiating Germany’s savers. This claim is obviously ridiculous and rests on a number of faulty assumptions. First, what is important for savers is not the nominal interest rate but the real interest rate (the nominal rate minus inflation). While it is true that the real interest rate is currently negative, there are various years when Germany still had the Deutsche Mark and interest rates on savings accounts were lower than the inflation rate, but the government and savers didn’t make a big fuss about it back then (partly because people suffer from money illusion). Second, the ECB has little influence on the real interest rate, which is determined by structural factors in the real economy. Global real interest rates have been on a downward trend over the last 3 decades, decreasing from about 4% in the 1990s to now close to 0%. The real interest rate is determined by savings and investment behavior. It should be noted that German savers directly contribute to the low real interest rate by exporting capital to the rest of the world during a time when there is an excess of desired savings on a global scale. Furthermore, the U.S. is the best example that interest rates can only rise if the economy recovers from its depressed state. The Fed was able to increase the Fed funds rate twice over the last year as the U.S. economy got closer to full employment. Ironically, more expansionary monetary policy in the beginning of the crisis would have assured a higher level of interest rates right now, but neither the Bundesbank nor the Merkel government seems to understand that.
- Economists have identified global imbalances as one of the problems causing the Great Recession in 2008/2009. As a consequence, most countries have reduced their current account deficits or surpluses, Germany being one of the few notable exceptions. While most Germans are proud about the fact that we are the biggest net exporter in the world, very few people seem to understand that with a current account surplus of more than 8% of GDP in 2016 Germany exported the equivalent of more than 300 billion USD to the rest of the world. This is capital that was not invested in Germany. German individuals and companies are building up their net foreign asset position abroad instead of investing at home. It is not entirely clear to me why this is a desirable policy, especially since returns on foreign assets have been far from spectacular in recent years (U.S. junk bonds, Spanish houses, etc.).
- Domestically, macroeconomic policy also has been nothing short of a catastrophe. Last year 10-year German government bonds were periodically having a negative yield. The German government could thus borrow at zero interest rates on a 10-year horizon. Instead of taking advantage of this one-in-a-century opportunity, Schäuble insisted on running a balanced budget, which simply does not make sense from an economic point of view. Under current economic conditions, given the low level of interest rates, the government could run a sizeable budget deficit while still maintaining a stable debt to GDP ratio if this seems to be desirable. Infrastructure investments would be basically paying for themselves right now. There are certainly many roads and highways that need to be repaired. There are schools that are falling apart and don’t have enough teachers. German Universities are mediocre in international comparison and small countries like the Netherlands or Sweden are outperforming a much larger country like Germany. How can it be that the entire economic discourse is about the cost of debt, which is non-existent under current economic conditions, while the costs of insufficient investment in infrastructure and education are completely forgotten.
I could go on, but will stop for now. Needless to say that I think the Merkel government has been a disaster for Germany and Europe. It is not in our interest to have stagnating economies all around us. I would encourage everybody to not vote for her in the next election because Germany desperately needs a change of face as well as a change of policy.