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Wednesday, January 09, 2013

Fed Watch: What's Good For the Goose...?

Tim Duy:

What's Good For the Goose...?, by Tim Duy: Via a tweet from Edward Harrison, Germany is preparing secret plans - not so secret anymore - to implement a wide-ranging austerity program after the elections. From Spiegel:

The government in Berlin is living in a dual reality. Strategists in the center-right coaliton parties are planning to enhance benefits for families, pensioners and the long-term unemployed in a bid to woo voters in the upcoming elections.

By contrast, due to the economic slowdown, experts in Schäuble's ministry are anticipating an entirely different scenario: The next government -- no matter who will be chancellor and which parties will be in power -- won't be able to boost spending. Instead, it will have to impose rigorous spending restraint.

According to the recommendations made by Schäuble's team...Germany will have to drastically increase taxes and make painful cuts in social services over the coming years.

These ideas don't fit with the current political climate in Germany...Schäuble nevertheless feels that his experts' forecasts are realistic. He has expressly approved their proposals and ordered them to continue to work on the cost-cutting program. At the same time, he has ordered strict secrecy to avoid any adverse effects on his party's campaigns for the upcoming state election in Lower Saxony in January and the general election in the fall of 2013.

Speigel describes Schäuble's plan as:

...nothing less than the most comprehensive austerity program in postwar German history.

But most amazing is the appeal to pro-cyclical fiscal policies:

The proposals from Schäuble's ministry serve to tighten a regulation that has only been enshrined in the German constitution for the past few years: the so-called debt brake, which calls for the German federal government to "maintain a nearly balanced budget" starting in 2016.

The government will still be able to take out loans to some extent. In 2016, for instance, it will be allowed to borrow some €10 billion. However, Schäuble and his staff say that Germany should not completely exhaust this scope for borrowing. They want a safety buffer...

One of the examples that they cite is "a sharp economic downturn." If the economy collapses, as it did in the wake of the financial crisis in 2009, experience has shown that public coffers come under considerable pressure...

This can have a devastating impact on state finances. Following the most recent recession, government debt soared from 65 to nearly 83 percent of gross domestic product (GDP). Schäuble's experts say that the country cannot withstand another similar increase in public debt and conclude that it's time to take appropriate countermeasures.

Attempting to control, or even reduce, a fiscal deficit as an economy slips into recession is economic suicide, yet that appears to be the only path European policymakers know. Indeed, part of the "need" for this austerity plan is the theory that what is good for the goose is good for the gander:

The paper by the Finance Ministry officials contains a further admission. The next finance minister will have to make up for what Schäuble has failed to accomplish. Merkel's most important minister forced half of Europe to submit to austerity measures while the Germans were spending money hand over fist at home.

In short, Germany looks set to further entrench the Continent's move toward an "austerity union," not a fiscal union, condemning the people of Europe to weak growth and high unemployment. And, as a reminder, the path of interest rates in Germany:


Absolutely no reason to think that a massive austerity plan is necessary. Completely opposite of the spike in rates that followed the 1990 reunification. Then spending control was needed in the wake of increased expenses to combine the East and the West. But interest rates are clearly indicating that completely opposite policies are now in order. Apparently policymakers only listen to the signals of the currently nonexistent bond market vigilantes.
Bottom Line: German plans for further austerity indicate that fiscal policy remains a downside risk for the European economy.

    Posted by on Wednesday, January 9, 2013 at 08:57 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (12)


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