Why can’t you just all be a little more German? | Sebastian Dullien

July 10, 2012, Donagh, Leave a comment

Why can’t you just all be a little more German? | Sebastian Dullien

We are often told that countries like Ireland, Greece, Portugal and Spain should be more like Germany. After all, their fiscal prudence in the early 2000 led to their strong economic position now, right? However, as Sebastian Dullien shows, compared to the adjustments already made in Greece, Portugal, Ireland or Spain, the consolidation and reform efforts in Germany actually look laughable.

The problem so far has not been unwillingness by the Greek, Spaniards or Portuguese to correct their budget problems. Instead, the problem has been that growth projections have proved to be grossly overoptimistic in the wake of budget cuts. As we see in the figures on the structural deficits, this is the real reason for the fiscal troubles these countries are in now.

So, what would have happened if the rest of the euro-area had been “a little more German”? Well, judging by the empirics of German adjustment of the past decade, this would have implied a much more pragmatic interpretation of the European fiscal rules and hence a much softer, slower and more growth friendly consolidation path. It is very likely that countries such as Spain or Portugal would have prevented the deep recessions they are now in (Germany managed to get through its consolidation with “only” several years of stagnation, not a deep recession) and we might have averted a full-blown banking crisis in Spain (German banks also had problems in the 2000s and a full-blown recession certainly would have pushed some of them over the edge).

Unfortunately, the German government does not seem to allow the rest of Europe to do as the Germans did. Instead, they are forced to conduct the unfortunate experiment of as-brutal-as-possible austerity without compromise – with the sorry outcomes we are now observing all over Europe.