VoxEU Column Global economy International trade

Why Germany should not listen to the US

Some Americans are calling on Germany to pursue expansionary fiscal policy. This column says that the German government should ignore US criticism of its savings measures.

Once again US economists and politicians, above all Nobel laureate Paul Krugman, are pressuring Germany to spend more money to support the international economy (Krugman 2010). They gave the same advice at the peak of the crisis in autumn 2008 (Krugman 2008). Back then, they were right that Keynesian deficit spending was called for to prevent a collapse of the world economy. The worst post-war recession required energetic measures to support demand – and in actual fact the worldwide economic stimulus packages totalling some €1 trillion brought the recession to an end as quickly as it had begun.

The criticism aimed at Germany was not justified even then. Not only did Germany, with its two discretionary economic stimulus programmes amounting to €84 billion, live up to its responsibilities, it surpassed them. Germany added an extensive social safety net, subsidised short-time working schemes, and also dismissal protection laws. As problematic as these may be in other regards, Germany exerted an immense, automatic stabilising force on the world economy. The German labour market has proved to be extremely robust, and transfer recipients were left largely untouched by the crisis.

Whereas US imports fell much faster than US exports, which plunged the world economy into crisis, the reverse was the case in Germany. The German balance of trade surplus fell from 2008 to 2009 by $74 billion. This is the net extent of the demand boost that Germany exerted on the world. Only China, with its net demand support of $102 billion, gave a stronger stimulus to the world economy.

Odd advice

Today the world economy is in the midst of a strong economic upswing, touched off by the newly industrialised countries, and which has fully impacted Germany. The Ifo Business Cycle Clock has now moved into the “boom” quadrant for the first time in more than two years. The majority of the surveyed companies have now finally reported that their current business situation is good. The IMF has estimated that the world economy will grow by 4.2% this year and by 4.3% in 2011 – a pace that is stronger than the average of the past four decades. This is why the recent advice from the US that Germany should stop saving sounds so odd. Now is certainly not the time for new stimulus programmes – now budget consolidation is called for. When, if not now, should the state begin to save?

America also knows, of course, that the world economy is booming, but it is seeking allies for its own debt policies, which have surpassed any justifiable level. President Obama, at the G20 Summit in Toronto, reluctantly subscribed to a savings policy but has no idea of how he will implement it. Today the US economy is on government life-support. The budget deficit this year will amount to 12.5% of GDP; 40% of the federal budget is credit financed. In 2011 the debt to GDP ratio will exceed 100% and move closer to the Greek’s level as of today. Now that the private securitisation of mortgages is virtually non-existent, 95% of all real-estate credit passes through three government institutions: Fannie Mae, Freddie Mac and Ginnie Mae. The Federal Reserve buys the securities of these institutions with freshly printed money since customers abroad have become scarce. The capital imports of the US have shrunk by half in comparison to recent years. Where all this will lead to, heaven only knows.

Responsibility for future generations

Unfortunately German banks were also strongly affected by the US crisis. Germany, along with China, was one of the major financers of the American capital market in recent years. The flow of credit flagged, however, as the shady nature of some US securities became clear. State banks and private banks will need years to absorb the write-off losses from US securities in their balance sheets.

Now America wants the German state itself to call up and spend the funds that no longer want to flow to America. This has its own logic. It is similar to the rescue programme for the crisis-stricken southern European states. But this is not the proper course.

Beyond the overcoming of the crisis there is a responsibility towards future generations, and the present world economic boom has negated all arguments for neglecting this responsibility. Instead it is mandatory that debtor countries such as Greece and the US restore the stability and credibility of their private and public financial systems so that lenders’ confidence can be restored and so they can grant new loans.

The US must reduce government borrowing by improving the creditworthiness of private debtors. To do this they need to develop more reliable securitisation structures, using covered bonds, and require that their banks hold considerably higher amounts of capital.

The most difficult adjustment will be giving up the standard of living financed by foreign capital. This also applies to the southern European countries. There is no way around painful structural reforms for the debtor countries.


Krugman, Paul (2008), “The economic consequences of Herr Steinbrueck”, The New York Times, 11 December.

Krugman, Paul (2010), “Dealing with Chermany”, The New York Times, 11 June.