Why Does Angela Merkel Hesitate?

German Chancellor Angela Merkel has been widely criticized for playing the spoiler in the competition to provide billions to prevent a breakdown of the world economy. But there are good economic reasons for Germany to wait before implementing a stimulus package, and Merkel's stance can also be explained by justified fears of the EU's redistribution machinery.

MUNICH – “Where is Angela?” is the question The Economist asked when Nicolas Sarkozy, Gordon Brown, and José Manuel Barroso met to prepare a European economic stimulus plan without Chancellor Merkel being present. Indeed, Germany is currently the spoiler in the competition to provide billions to prevent a breakdown of the world economy. Why is Germany so hesitant when it comes to economic stimulus programs?

One popular theory is that, given the supply-side orientation of German economists, there is little sympathy for Keynesian, demand-oriented prescriptions. But no German economist has come out against an economic stimulus program, and many favor one. Whereas Keynesian theory has largely disappeared from economic textbooks in the United States, it continues to be taught everywhere in Germany. German economists, in contrast to their American colleagues, never abandoned Keynesian policies as a means to combat demand deficits. Moreover, German politicians rarely heed the advice of German economists.

A second hypothesis is closer to the truth: the decline of economic activity in Germany thus far has not been as strong as in other countries. Germany did not have a real-estate bubble that threatened to burst, as did Great Britain, Ireland, Spain, and France. Germany has only been indirectly affected – by the decline in worldwide demand for German products – which explains an important timing difference in the business cycle.

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