You Tell ‘Em, Timmy! (And Barry!)

I have been in Germany (in Strasbourg today, returning to Germany tomorrow).  It has been amusing to watch the German reaction to the hectoring/lecturing from the US about the need for Germany to increase government spending.  The German reaction ranges from bemusement to disdain.  Here’s the Bloomberg take:

Merkel, addressing a business audience in Berlin today, said she told Obama in a phone call that cutting government debt is “absolutely important for us,” exposing a second point of contention ahead of the June 26-27 G-20 summit in Canada.

Reducing the budget deficit by 10 billion euros ($12 billion) per year “won’t put a brake on the world’s economic growth,” Merkel said, relating what she told Obama yesterday. Germans are more likely to spend money if they feel the government “is taking precautions” to ensure solid finances, she said.

Four days before world leaders meet in Toronto, Germany is heading for conflict with the rest of the G-20 over tighter financial regulation, a banking levy and U.S. calls to boost growth rather than cut debt.

The G-20 must “safeguard and strengthen” the economic recovery and promote “global demand growth that avoids the imbalances of the past,” Obama said in a June 16 letter to fellow G-20 leaders. He expressed concern about “heavy reliance on exports by some countries,” which he didn’t name. Treasury Secretary Timothy F. Geithner called on June 5 for “stronger domestic demand growth” in European countries like Germany that have trade surpluses.

I have been ambivalent on Merkel.  She has been good on some issues, but has been terrible on Russia, and hasn’t shown a lot of leadership in the Greek/PIIGs crisis.  But at least it is clear that she hasn’t drunk the Keynesian KoolAid that Timmy! (and Obama, and Summers, etc.) are pushing.  Indeed, it is encouraging to see the leader of a major government acknowledge, at least implicitly, the Ricardian point that current consumer spending depends in no small way on expectations about future government expenditures: “Germans are more likely to spend money if they feel the government ‘is taking precautions’ to ensure solid finances, she said.”  It would be refreshing if our policy makers would consider the possibility that American consumers and investors are reluctant to spend freely because of the looming fiscal imbalances in the US.  Unlikely, but refreshing.

About Craig Pirrong 223 Articles

Affiliation: University of Houston

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.

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