One German economist is ready to spend, stimulate
As Europe tries to climb its way out of a debt crisis, the continent’s largest and strongest economy, Germany, has pushed its neighbors to reduce budget deficits and pledge to keep long-term public spending under control.
But with the Eurozone facing a recession, Germany’s insistence on austerity — also known as fiscal consolidation — has drawn criticism from those who subscribe to British economist John Maynard Keynes’ formula of increasing public spending during economic slowdowns to spark demand and economic recovery, and then reining in spending during prosperous times.
Although Keynesianism still largely drives the economic discussion in the United States and elsewhere, the philosophy is nearly extinct in austerity-minded Germany. The major exception is Peter Bofinger, 57, an outspoken Keynesian on the influential German Council of Economic Experts, which advises the government and whose members are known as the Five Economic Sages.
Your predecessor on the German Council of Economic Experts said when you took the job that you were likely to be known as Germany’s “very last Keynesian.” Is that as lonely as it sounds?
If you take German politics, it’s absolutely totally non-Keynesian right now because [Chancellor Angela] Merkel and [Finance Minister Wolfgang] Schaeuble are propagating policies for Europe that are clearly counter to any Keynesian insight, which means they are proposing fiscal austerity for certain countries that are already in recession. That’s Greece, that’s Italy, that’s Spain, that’s Portugal.
And what does that mean for you? Do you find yourself alone in fighting for more stimulative policy in Europe?
I think in Europe you find many economists who share my views. In Germany, it’s really more difficult. In Germany, the notion that too much consolidation can be counterproductive is not widespread among economists. Therefore, there is almost no criticism of the strategy that is pursued by Merkel.
How did Keynesianism become so unpopular in Germany?
There are ups and downs. There was a heyday of Keynesianism in the ‘60s … and then Keynesianism got a worse and worse reputation because we had increasing deficits and government debt went up. However, in 2009, Keynesianism was rediscovered: The policies that we embraced in the recession were clearly Keynesian, and they worked. The funny thing is that now, although they worked, the opposite approach has been adopted, which says we cannot cure debt with debt — that’s Mr. Schaeuble’s saying.
Which is the greater threat to the European economy right now, excessive debt or recession?
Recession. If you try to cure debt with consolidation, that means recession, and you create more debt. So my approach would be, of course you have to consolidate, but you need a little bit more time to avoid counterproductive consolidation. So you have more growth, and that will be the more promising avenue to get out of debt.
In that vein, what do you think of the German-led fiscal pact agreed to ... in Brussels that limits the deficits that countries can take on, even in times of recession?
This fiscal compact is a way to make houses more fireproof. But if you have a situation where there are houses burning, it’s better to focus your effort on how to stop the actual fire than to devote too much time to future fire prevention.
If Germany’s obsession with austerity is so problematic, why is the German economy outperforming every other major Western economy right now?
I think to some degree our success depends on other countries’ policies that are more expansionary. Imagine the United States with just a 1% deficit, instead of the 9 or 10% deficit it has. Imagine what the global economy would look like if there were such fiscal austerity in the U.S. That would of course also have a negative impact on the German economy. So to some degree, we profit from the fact that other countries are doing the dirty things we don’t want to do.
You’ve repeatedly called for the issuance of joint Eurozone debt, such as collectively backed “eurobonds.” But the Merkel administration has expressed firm opposition to the idea. Do you think we’ll ever see it happen?
In the last few years, we have seen so many things that were regarded as unrealistic become reality. So I think in this respect there’s a chance for eurobonds. The problem is, if you really want eurobonds … you need a European institution that is able to force a country to increase taxes.... That’s where the current situation is blocked. You need a willingness to have more fiscal integration that goes beyond this contractual approach that is so far followed by Merkel and [French President Nicolas] Sarkozy.
European officials have brushed off calls from the Obama administration to take more aggressive action to fight the debt crisis and have rejected the idea of fiscal stimulus to help spur economic growth in Europe. Do you think stimulus would be the right approach now?
If you compare the performance of the euro area and the United States in the last 12 months, you can see the U.S. fiscal policy has remained on an expansionary path. As a consequence, the U.S. economy has maintained its momentum, and unemployment went down. In the euro area, fiscal deficits were much lower, and there was a lot of consolidation. As a consequence, unemployment has gone up and the euro area is now in a recession. You can see different approaches leading to different outcomes.
What about here in Germany? You’re saying that unemployment has gone up in Europe. But how hard is it to persuade Germans that they should be changing their approach when unemployment here keeps going down and the German economy is fairly strong?
First of all, the German economy is no longer that strong. In the last few days, we’ve seen very negative news on industrial production, on retail sales, on exports, on orders. The German economy will not be an island of growth in a euro area that is affected by recession. So I think it’s our self-interest not only to sit and wait, but to ask what can we do to stimulate our economy.
Yes or no: Will Greece still be on the euro a year from now?
Yes. I think they’ll make it. Somehow. I don’t know how.
Yes or no: Will Germany still be on the euro five years from now?
Yes. But it’s unclear which euro it will be.
Wiener is a special correspondent.
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