Need for fresh reflationary policy mix
The government in Berlin is perfectly at ease with its rigorous deficit-reduction programme, since it regards the austerity medicine as good for growth. Germany’s Finance Minister,Wolfgang Schäuble, brimming with enthusiasm for the virtues of fiscal austerity, even offered his services to his US counterpart,Treasury SecretaryTimothy Geithner, to explain the wisdom of following what he referred to as ‘Germany’s recipe’.
Although, on the face of it, an amusing insight into politicians’ thinking, this anecdote does highlight the risk that one or more mistakes in macroeconomic policy might be committed in the developed world where economies are still struggling to regain their strength after the 2008-09 recession.The German minister’s attitude, in reality, betrays a lack of understanding of the fundamentally different circumstances in which Germany, on the one side, and the US, on the other, find themselves. Germany’s recipe would not suit the diet the US needs to follow. Unlike the US, Germany did not experience a bubble in its property sector over the past decade. Nor did it see excessive consumer spending fuelled by a temporary wealth effect, so German households have not had to endure the pain suffered by US consumers as they strive to rebuild their battered finances. Quite different remedies are needed to treat the different symptoms and disorders.