Why Does Angela Merkel Hesitate?

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.

Whereas unemployment in the US has been rising for one and a half years, Germany currently is enjoying its lowest unemployment rate in 16 years. The German construction industry and retailing are still stable, as the latest survey of the Ifo Institute shows, and the whole world is profiting from this stability, as Germany is the second largest importer of goods and services after the US. While US imports are declining sharply, German imports are holding up –without any economic stimulus plan. This is why many Germans wonder whether the foreign criticism is fair.