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Interview with economist Michael Burda: 'Germany has to do its part'
Will the stimulus ignite growth or simply burn taxpayer cash? Photo: DPA

Interview with economist Michael Burda: 'Germany has to do its part'

Published on: 13 Jan 2009 12:03 CET

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Germany has been widely criticised for dragging its feet in the wake of the global financial crisis. Is such criticism valid?

Germany is biggest economy in both the European Union and the eurozone, so if it isn’t doing what Europe is expected to do in response to the crisis, Germany will drag down that average. And that’s why a lot of people are paying attention to what Germany is doing. On the other hand, in Germany’s defence, this is an election year, and people still expect some sort of solid fiscal responsibility from their politicians. But the priority should be to pass some sort of demand stimulus. If they don’t do it now it will be too late. The same effort later on might not have the same effect.

But Germans also didn’t really believe they were responsible for all of this. Most economists are convinced that the United States was at the root of the crisis, but the rest of the world bought into it and it’s a globalised problem now – it’s become a real economic problem, not just a financial problem like last year. So even if Germany thinks it was the fault of the US or UK because of lax regulation of financial markets, it’s now everyone’s problem. It’s spilled over into the things Germany cares about – machinery and high-end cars.

How does the German response compare to other big economies such as Britain, France and the United States?

There’s been a recognition lag here. It’s like you’re sitting on the beach and you see a tsunami coming. You still have 20 minutes to decide what to do. Then you really have to act decisively. Europe at least has had the benefit of seeing the tsunami hit the United States. But Germany is not a very Keynesian place. Tinkering with the (economy’s) motor is not what a lot of politicians here like to do. But this is a very serious situation. This is something we haven’t seen in decades. This is shock that will create a chain of events. Germany is not really used to doing this kind of stuff.

Is this perhaps the problem with Chancellor Angela Merkel’s grand coalition? The parties are pulling in different directions?

Having a grand coalition has all sorts of disadvantages but it also ensures everyone is onboard. No one is blocking. I was actually very encouraged by what happened last night. Every party wanted to put their little stamp on it so they could say they got something for their constituency. But that’s all secondary to what we need right now – which is a good jolt of demand to prop up the economy, because otherwise a lot of people are going to be losing jobs.

What’s your take on Berlin’s latest €50-billion stimulus package?

That’s not a whole lot if you look at the numbers – especially if you look at the US, which is pushing for a much bigger programme. If they go for $750 or $800 billion and get it through the Congress that’s a huge stimulus. That corresponds to the gravity of the situation as American experts see it right now. I do think there’s a difference here. The European real economy will be affected less. A lot of this is self-interest. Why should Germany do something for the United States right now? Within Europe you might have a real problem, however. If people think Germany is dragging its feet while France and Britain appear to be very much on the side of the United States that could push Germany to do more.

The bottom line on this package is going to be that it’s too modest right now. One can't really afford to be a penny-pincher right now. All this concern about the deficit – I agree with the Maastricht criteria, but right now we’re in a situation where if we don’t save the European economy in the near term the euro area might eventually break up. These are drastic scenarios that people don’t want to talk about.

Germany is the world’s biggest exporter. How much is really in other people's hands? If other economies are underperforming will they still by fancy German cars and machinery?

Europe is still a mosaic – it’s not like the US. When (Barack) Obama becomes president he can just say the federal highway system will be refurbished. He can just do it. The lag between decision and implementation is short. But in Europe, sovereign states have to decide. And European economies are quite open these days. Germany exports and imports around 40 to 50 percent of its gross domestic product. It’s like California – which has an even higher export rate than Germany’s. Think of (Governor Arnold) Schwarzenegger being asked to provide fiscal stimulus for the entire country. That’s a bit much. But Germany has to do its part. Germany can’t be expected to pull everyone out of this problem, but if it doesn’t do its part it won’t work either. The expectation is now that Germany takes a leadership role and inspires the laggards to do something too. But the coordination problem is enormous in Europe.