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What's Worse? Debt or Frugality?

"Bashing Germany is the new favorite sport for policy makers and economists who want a more balanced world economy," writes The Wall Street Journal and points out: "That Germany's economy is unbalanced is clear. Household incomes and consumer spending have stagnated for a decade, and economic growth has come almost entirely from exports and related investment. Consumption is set to drop 1.4% this year, even though the overall economy will grow 1.9%."

The WSJ explains the German position very well, even though it does not quite agree with it:

German Chancellor Angela Merkel argued in an interview last week that balancing the budget could even unlock consumers' wallets-whereas deficit spending might only lead to even-higher household saving. Germans save because they are worried the public pension and health-care systems will run out of money, and would save less if they had confidence in sustainable public finances, she argued.

Ms. Merkel's first term doesn't offer good evidence for that view, however. Germany cut its budget deficit from 4% in 2005, when she took office, to nil in 2008, before the financial crisis struck. In that time, Germans' household savings rate rose rather than fell-to 11.2% of disposable income, from 10.5%. The core problem is lack of growth in Germans' disposable income, not high savings rates which are largely justified for an aging population, say most economists.

Endnote: Does Obama sound French, when he says that he is "concerned by weak private-sector demand and continued reliance on exports by some countries with already large external surpluses."? He was clearly asking Germans to buy more American stuff. (Hey, nearly everyone is walking around with iPhones and the city is full with huge iPad advertisements. Or are that Chinese products?)

Finance Minister Schäuble hits back at Obama by saying: "Governments should not become addicted to borrowing as a quick fix to stimulate demand. Deficit spending cannot become a permanent state of affairs." Oooch. I think most Germans agree. According to polls a majority of Germans are even against tax cuts. Can you believe it?

US, France and Germany: Divisions and Lack of Professionalism Everywhere

We all need more team spirit. Obama's Afghanistan team is in disarray. Their egos seem to be as bloated as the ego's in the French soccer team.

While President Obama is angry with McChrystal's frank comments and perhaps insubordination, President Sarkozy is reportedly furious over the national team's behaviour inside and outside the soccer stadiums. It was not really a "team." He even cleared his schedule for a one hour meeting with the captain on the day of a general labor strike. That shows how important the soccer team is for France as a symbol of national integration and unity.

Germany's coalition government has been in disarray for months as well with some calling each other "wild pigs" and "gherkin troops" (rank amateurs). (There are also rumors that one cabinet member called the defense minister "rumpelstiltskin.") Though, thanks to the national soccer team's victory over Ghana today, Merkel's government won't collapse yet. ;-)

If Germany had failed to make it into the round of sixteen for the first time in history, it would have been a national fiasco. Let's do not forget that the German coach is not called "Trainer der Nationalmannschaft," but goes by the official sounding name "Bundestrainer," just like the top government titles "Bundeskanzler," "Bundespräsident" etc.

On Sunday, we will play against England. One British fan said on TV that the world cup was invented for England and Germany to play against each other. Good point. Still, it is regrettable (but not at all surprising) that the British tabloid The Sun uses military language to describe the upcoming match. Come on, guys. It's just soccer. The real war is in Afghanistan.

Continue reading "US, France and Germany: Divisions and Lack of Professionalism Everywhere"

Austerity and Regulation vs. Stimulus: The Latest Transatlantic Squabble

Ahead of the G-20 summit we are witnessing rising German-American disagreements. Germany wants to reform the financial markets and deal with the debt crisis, while US academics and the president prefers economic stimulus plans and criticize the teutonic export champion. Spiegel International:

Krugman is far from alone with his concerns about German and European austerity packages. Last week, US President Barack Obama sent a letter to other G-20 countries in which he fired a not-so-subtle shot across Berlin's bow. "I am concerned about weak private sector demand and continued heavy reliance on exports by some countries with already large external surpluses," he wrote in a clear reference to Germany. He also warned against reversing economic stimulus policies too soon. "We worked exceptionally hard to restore growth," he wrote. "We cannot let it falter or lose strength now."

Germany and France were hoping that the G-20 summit would focus on measures aimed at reforming global financial markets. In particular, Merkel would like to see an international tax on financial transactions as well as a mandatory bank levy, which would go towards a fund to be used to bail out banks in future crises. But opposition to both proposals has been stiff. And the US, in particular, is hoping to use the G-20 to push for more economic stimulus rather than less, given ongoing high unemployment at home.

Personally, I am not sure, if the US and Europe really need and can afford more stimulus plans right now. They make the long-term debt crisis worse. Besides, tax cuts do not lead to more consumer spending, when citizens are smart enough to realize that the economy and government finances are in trouble and consider tax cuts for what they are: desperate measures to stimulate growth. In those cases citizens use the tax cuts to save more money to prepare for the worst. Of course, stimulus is more than tax cuts.

ENDNOTE: I am sorry for the lack of blogging. In the last six weeks, I learned quite a lot of stuff the hard way: First, a new bike with strong front wheel breaks is not necessarily a good thing. Second, I cannot fly. Third, a broken elbow joint requires two surgeries, the second one kept three doctors over four hours busy. Fourth, doctors and nurses are nicer and more caring than I thought. Even the hospital food was good. Our health care system is still okay. Fifth, even if only the elbow is broken, fingers don't work (typing etc.) very well. Regaining full flexibility apparently takes months. Sixth, one can get quite a lot done with just one functioning arm. Now "I'm a graduate of pain." Yeah.