New Year's resolutions and the fiscal policy plans of Germany's finance minister Schäuble

First of all, best wishes for the New Year 2013 to all my readers, a growing cosmopolitan community ranging from residents of Germany (my largest audience), followed by readers residing in the United States, Russia, France, the UK, Italy, Ireland, Belgium, China, and Croatia (ordered by number of pageviews). Next to this top-ten list of countries tracked by google, my blog has readers in Mexico, India, Indonesia, and Thailand interested in economic developments in the eurozone. If nothing else, this shows the growing impact of Europe's economic policymaking on the economic fate of many other countries on our wonderful planet. I hope, European policymakers will live up to this responsibility in the new year and beyond.

Not only Arianna Huffington of the Huffington Post would like to hear the following New Year's resolutions from European policymakers:

"We will learn that the best way to get rid of deficits isn't austerity but growth"

and addressed specifically to Angela Merkel: 

"I will realize that destroying the economies of Germany's trading partners is not good for Germany's economy."

With every new statistic showing Germany's economy slowing down due to declining demand from Southern Europe, Germany's Very Serious People in power begin to realize the latter (see also my blog of August 4, 2012: "Austerity chickens are coming home to roost in Germany"). However, the Schwabian housewife policy dogma of saving, saving, and saving again (among economists known as the "oxymoronic" - cit. Larry Summers: "you can drop the prefix" - expansionary austerity model) still seems to prevail in Germany's finance ministry:  The New Year had not yet begun when the news surfaced that Mr. Schäuble's finance ministry is planning a substantial fiscal austerity package to prepare for future charges related to the eurozone crisis. Designed by Dr. Ludger Schuknecht (a nerdy-looking dyed-in-the-wool fiscal policy hawk with experience at the IMF, WTO, and ECB), director general of fiscal policy and macroeconomic affairs at the finance ministry, the austerity package includes a higher VAT (a regressive tax which unproportionately puts the burden on lower-income groups), a reduction of the federal contribution to Germany's health fund, a new health 'solidarity' tax, a further increase in the legal retirement age, and a cut in widower's pensions.

Apart from the fact that this austerity package is politically ill-advised just before Germany's upcoming national election in September 2013, it is ethically questionable in view of the fact that Mr. Schuknecht happens to be a board member of the Hypo Real Estate (HRE), a bank that continues to benefit from a €100 billion taxpayer bail-out. (see my blog "Don't Shock the Countries, shock the banks/ters, part III: make the banks/ters pay !")  The German austerity plan also drew immediate criticism from the IMF's Managing Director Christine Lagarde for harming the growth propects in Southern Europe. In an interview with the German weekly "Die Zeit", Lagarde pointed out that Germany's relatively prosperous economy is needed to counterbalance the negative effects of austerity, not add to them. Germany and other countries "can afford to move ahead with consolidation at a slower pace than others," Lagarde said. "That serves to counteract the negative effects on growth that emanate from the cuts made in crisis countries." Lagarde further pointed out that "trade imbalances have to be reduced" by lowering trade deficits in the South [of Europe] and strengthening demand in the North (see the complete Zeit interview here and the Spiegel online report here).

This admonition of German economic policy from the highest levels of the IMF hierarchy follows on the heels of a damning US Treasury critique of Germany's chronic trade surplus, reflecting rising irritation in Washington over Germany's "free rider strategy, which relies on exploiting global demand rather than generating it at home." According to a UK Telegraph article of November 2012, US Treasury officials "told Congress that internal [im]balances within the eurozone are disrupting the global trade structure", specifically noting Germany's current account surplus of 6.3% of GDP, and Netherland's surplus of 9.5%. US Treasury officials argued that "the EMU regime of austerity in the South without offsetting stimulus in the North is creating a contractionary bias, holding back global recovery" and correctly observed that "eurozone surplus states have available room for fiscal stimulus but refuse to act", instead clinging to "fiscal austerity policies that constrict internal demand".

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These developments show that we all, but especially the voting population in Germany, need to keep a watchful eye over economic policymaking in Germany, the largest economy with a determining impact on the eurozone, and thus the global economy. While austerity and structural adjustment programs continue to be more than necessary for eurozone banks and banksters, we need to clearly signal at the ballot box our strict refusal of austerity policies for the general population, whether they be in Greece, Spain, Italy, France, Germany, or elsewhere in the eurozone. Instead, we need a substantial deleveraging, restructuring, and consolidation of the eurozone banking sector as well as a rebalancing and coordination of intra-eurozone trade and macroeconomic policies to preserve the euro and ensure a sustainable functioning of the eurozone economy.

"More than at any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly.” (Woody Allen)