Germany’s “Morality” Is Hurting It

Germany's Morality Is Hurting ItGermany has been one of the most annoying countries over the past decade. It dominates the EU. And when countries like Greece and Spain got into economic trouble after the 2008 crash, you could count on German leaders to hector them. If they had just been more like Germany then everything would be fine! Well, right now, Germany’s economy has stagnated and is looking to go into recession.

By being “more like Germany” it was meant that these countries should run budget and trade surpluses. There were a few problems with this.

Balanced Budgets

Everyone wants economics to be a morality play. Everybody wants it to be a tale of sin and excess and then the punishment for sin –Paul Krugman

First, Germany was pushing Greece and other struggling economies to balance their budgets at the worst possible time. When a country already has an under-performing economy, cutting back on government spending will only cause the economy to shrink. Germany (and many other Very Serious types) called for expansionary austerity. This is the idea that by cutting back on government spending, the economy would grow. This idea may work in extremely rare cases, but it never worked during this crisis.

This is just a minor change on supply-side economics. The idea is that if businesses see the government “getting its house in order” they will have confidence and start spending. Anyone who has ever run a business knows this is nonsense. Business people look at what the demand is in the economy. It’s very simple: will people buy their products and services?

Now business people can be twisted by propaganda like anyone else. So we get a constant diet of business people claiming that they are most concerned about government debt. But polls from that time showed again and again that what they really worried about was the lack of demand.

Trade Surpluses

In the wake of the 2008 crisis, Germany saw its exports go up: from 1995 to today, Germany’s economy went from exports of 15 percent to almost 50 percent. This was a time when, as the best economy in the EU, Germany should have been importing more. But no. Germany had to show everyone how it was done!

Of course, it is ridiculous to ask other economies to export more. Every country can’t run a trade surplus. And the way things normally work is that weaker economies import from stronger economies. During the crisis, the strongest economy was hurting the weaker economies and claiming that doing so was moral.

(It’s also interesting that the whole world made out that Greece was horrible from having borrowed too much money. Yet very rarely did anyone note that it was German bankers were at least as much to blame for loaning money to a bad credit risk. But somehow it’s easier to criticize the poor and weak than the rich and powerful.)

Economics Is Not a Morality Play

As Paul Krugman said back in 2013, “Everyone wants economics to be a morality play. Everybody wants it to be a tale of sin and excess and then the punishment for sin.”

Thinking of the economy in these terms has been the single most important impediment to getting the world economy back on track. No less than President Obama said that the government had to “live within its means.” Even if that is sometimes true, it certainly wasn’t in 2011.

And now Germany, so proud of its economic morality play, is experiencing a bad economy despite being so “good.” Its good economy was because Germany had the best economy going into the crisis and so were able to prey upon the weaker economies of the EU.

Sadly, I doubt that the German elites will learn anything from this. Like elites everywhere, they will find a rationalization for why they were right all along. But the facts are clear.