The G-8 meeting “will certainly be an interesting discussion” as a result of these differences, a senior German government official said Wednesday, speaking to reporters in Berlin on the condition of anonymity in order to candidly discuss German government thinking ahead of the summit. But he added that everyone was in favor of economic growth.
An ingrained fear of debt
The German aversion to debt and faith in savings runs deep, and has held firm even though their economy is by many measures doing its best in decades. Rather than taking advantage of record-low borrowing costs to ramp up spending, German officials brag that they will instead get their budget close to balanced by 2014, two years earlier than their targets, and they have until recently resisted tax cuts. They say they have a special obligation to chop their deficits, because they are preaching similar medicine to European countries that are in trouble.
But the fear of debt isn’t just on the official level. Most German credit cards require payment in full at the end of the month, and many businesses take only cash. Households socked away 11.3 percent of their disposable income last year, according to estimates by the Organization for Economic Cooperation and Development, compared with 4.6 percent in the United States. Austerity even reaches the top: One of Merkel’s top economic advisers carries his papers in a simple student’s book bag instead of a briefcase. And the chancellor herself still lives in a modest apartment in Berlin’s city center.
Wages have been stagnant for the past decade, part of a deliberate strategy to make Germany more competitive. That wage restraint has helped fuel the export boom here, but it has also made ordinary workers vulnerable to inflation and kept domestic consumer spending anemic. Critics say that it fueled Europe’s economic crisis by starving Spanish and Italian exporters of potential customers and depriving Greece and Portugal of German tourist money.
“There had to be the spirit of wage moderation,” said Guntram Wolff, an economist at the Bruegel think tank in Brussels who once worked at Germany’s inflation-fighting central bank. “But they have gone too far.”
Hints of a shift
Critics of Germany’s crisis response say that the imbalances in trade levels between euro-zone countries are a better explanation for Europe’s problems than excessive government debt. Ireland and Spain, both suffering deeply from the crisis, actually started out with significantly lower government debt levels than Germany. By these critics’ reading, the austerity drive has actually damaged economic prospects by hurting businesses and drying up tax revenue. Investors, rather than growing more confident in struggling governments, have demanded higher interest rates on loans, exacerbating the problem.
Germany’s opposition Social Democrats have pushed for more growth. But they too are cautious about stimulus, and like to remind voters that it was under their leader, former chancellor Gerhard Schroeder, that Germany pushed through the tough structural reforms that they credit for its current prosperity. The country’s modest 2009 cash-for-clunkers program, at the height of the credit crunch after Lehman Brothers’ collapse, was dwarfed by the the scale of the U.S. response.
There are signs of an easing of Germany’s position. Schaeuble, the finance minister, said this month that he was comfortable with German wages rising faster than in other European countries and even with somewhat higher inflation, which would give relief to struggling southern European countries by making their exports more competitive.
But the move immediately set off panic in the German press. The country’s most widely circulated daily newspaper, the Bild tabloid, shouted “Inflation Alarm” in a three-inch-high headline last week.
“One of the issues is that the crisis isn’t felt very much in Germany,” said Clemens Fuest, an economist at the University of Oxford who advises the German government. “Of course there is a lot of theoretical debate, ‘Should we do more to help growth?’ But it is still relatively abstract.”