Economic Growth, Not Fiscal Prudence, Explains German Success

It’s a small thing, but one problem with basic too much economic writing on national stereotypes is that you get sentences like “[t]he bloc’s more fiscally prudent members – above all Germany, Europe’s largest economy – have endorsed multibillion-euro financial rescues for Greece, Ireland and Portugal, eased the terms of these rescues after they appeared too onerous, and secured a change to the European Union’s basic treaty in order to establish a permanent crisis-fighting fund.”

Since everyone knows Germans are prudent, it’s easy to just kind of glide past this assertion. But if you look at the actual budget figures on the right, you’ll see that Spain — a country full of fun-loving Spanish people — was actually running extremely prudent budgets throughout the boom years. The same is true of Ireland and I believe Portugal as well. There was nothing particularly imprudent about German budget practices during this time, but the fact of the matter is that Germany was running a larger budget deficit than was Spain. Since the recession hit, that’s obviously flipped around. But again the issue here isn’t really one of “prudence.” Germany responded to the downturn with a pretty vigorous fiscal stimulus program while Spain has enacted repeated austerity packages.

Today, needless to say, Germany is in much better budgetary shape than its Southern European peers. But this has much more to do with growth than with prudence. Germany was able to enact a well-designed stimulus program, Germany’s real economy was much less dependent on the housing sector, Germany is good at making products that sell well in China, European monetary policy is designed to be appropriate for German economic conditions, etc. None of this is to disparage the prudence of German politicians (or voters) or to deny that the objective structure of the Eurozone does in fact force Southern Europe into austerity budgeting. But once you understand that German success is due to better German growth rather than better German prudence, you understand that other countries can’t austeritize their way out of the situation. If you want a story about why Greece or Ireland or Portugal or Spain or Italy is going to be able to meet its financial obligations, that has to be a story that involves those countries increasing their real output. “Prudently” raising taxes and cutting social services in a country that already has double-digit employment isn’t going to do the trick.