Tales from the North Atlantic

by Michael Smith.

Once the lifeboats on the Titanic were full and in the water, the fellows left on deck would have had a little time to kill before the big swim meet. I can see a few what-the-hell types raiding the ship’s liquor stock—which surely was exquisite, considering the clientele—and making their last hours on earth as pleasant as possible. Hey, just send me a bill, right?

That’s how I’ve always seen Europe’s social democracies: passengers on a big party boat, determined to get the last dance in before lights out. Have another bourbon on the rocks—we’ll all be on the rocks together by morning, so no use arriving sober.

Well, guess what. There’s a party poop on board. Last week, German Chancellor Angela Merkel slammed her shot glass on the bar and said, “Boys, that’s enough.” She met with her cabinet and announced plans to cut unemployment benefits and defense spending, to postpone building a replica of a Prussian palace, to raise taxes on air travel and nuclear power, and even to slash thousands of civil service jobs.

The stimulationist community is aghast. U.S. Treasury Secretary Tim Geithner had just called for countries with trade surpluses (like Germany) to promote “stronger domestic demand” and try to grow their way out of recession. Many economists back him up. Merkel expects to be pummeled at the Group of 20 summit in Canada later this month for choosing belt tightening over pump priming. Consumption “that is financed by debt is not our mentality,” she told her Christian Democratic Union party on Friday.

Well, it’s certainly ours. Of course, the Germans will run a federal deficit of 5.5% of GDP this year, so caution and frugality might still make sense for them. The U.S. deficit will nearly double that, so we’re at that giddy “what the hell” stage. Watch me dodge these icebergs!

Will history vindicate Merkel? Search me. No crystal ball here. But if Germany gets serious about budget cuts, our future conversations about economic recovery will be far less theoretical. We’ll have serial stimulus packages on one hand, and German austerity on the other. Compare and contrast, as they say.

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1 Comment
  1. John Lumbard says:

    Hurrah for Merkel! The German economy isn’t going to grow much in the next year, so we’ll have to hope that the world doesn’t come away with a belief that borrowing and spending is a good thing. The “good” news is that the stimulus-heavy countries won’t grow much, either.

    We’re quite fortunate to be confronted by so many stark examples of the dangers of excessive debt and Big Government. The media have been studiously ignoring the endless recessions of Japan for the last couple of decades, but the Greek tragedy— and the prospect that assorted other European countries would follow—really got their attention. We can’t let this crisis go to waste . . . . .

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