Chancellor Merkel misguided about stimulus

March 28, 2009 11:37

Chancellor Angela Merkel is arguing that the stimulus program will lead to inflation; that Germany is already highly indebted and that Germany and Europe cannot afford to spend more on fighting the slump.The facts tell otherwise. As of 2008 the debt of all levels of Government in Germany including the Landern, and the local levels was about 62.5 % of the German GDP.The federal level of government has a debt to GDP ratio that is at least 20 percentage points lower.
This is a far cry from any sort of dangerous level and there is substantial room for a much larger stimulus than the relatively modest one which Germany has thus far budgeted for which amounts to about 2 % of the GDP. It is only because of the monetarist inspired Maastricht agreement on debt and deficits that the Euro area has signed on to that she is making this kind of argument. That out of date and economically discredited doctrine argued that debts should not exceed 60% of the GDP and deficits 3% of the GDP. But the events of the past two years should have made it clear that the kind of economic policy that it stood for has failed miserably and is no longer ,if it ever was, appropriate for the current circumstances.

Germany is an economic powerhouse with the largest economy in Europe and the world's third or fourth largest depending upon how you measure the Chinese economy after the USA and Japan. It can easily afford to do more to contribute to stimulus both in terms of its own citizens and in the interests of global recovery. Its traditional concern for inflation is understandable in view of the German experience with hyperinflation in the 1920s. But there is no risk of that kind of   extreme inflation or even normal high inflation in the policy of stimulating the economy by 6% or more of the GDP in the current disinflationary slump circumstances. Chancellor Merkel is a scientist by training and a highly intelligent politician . She should ask her economic advisors some tough questions about the economic models they are operating with. A paridgmatic shift is underway and she ought to get Germany on board.