Roosevelt Institute | Cornell University

Austerity or Stimulus? Merkel and the Eurozone Decide

By Jordan JacksonPublished November 9, 2014

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Angela Merkel has headed the European economic recovery initiative for over a decade now with austerity - a prevailing model that has seen the German economy stabilize in the wake of the crisis. However, as infrastructure and GDP slows in Germany, is austerity still enough to fend off a recession. The remedy may now rest in stimulus.
By Jordan Jackson, 11/9/14

Heroic, unapologetic, deadpan, frugal and a bit unpolished, Angela Merkel — or "Mutti" [Mummy] as the Germans have come to know her — has gradually captured the infatuation of the international community since her election as German Prime Minister in April of 2000. Part of it is her seemingly unattached, yet decidedly cautious approach to the Eurozone, and part of it is in her scientific handling of German austerity policy — positioning her nations economy, via austerity, as one of the more stable Euro-economies in the decade proceeding the crisis. But with recent economic turbulence domestically and abroad, is the use of austerity subsequently retarding the growth of the world economy?

From the past fiscal year, evidence has indicated that the German economy, the largest in Europe, is stalling. Being that Germany has all but conducted European economic recovery over the past decade — issuing loans and bailouts to precarious nations such as Greece — the scrutiny starts with Merkel and her domestic policies in that what happens in Germany will be felt across Europe. Many see Merkel as the defacto head of the Eurozone, and Germany its future. With such significance, it would be best advised to apply any remedy possible to keep this leading economy from stalling.

For the case of a stalling German economy, the issue centers on the age-old economic debate of stimulus versus austerity. For a over a decade, Merkel has crafted austerity in Germany, offering a "pair of safe hands" that has gone a long way in stabilizing an otherwise precarious worker's class — jump-starting the counties industrial powerhouse, and reinstating flexibility to the German labor economy. But as export revenue and an overall degradation of economic growth ensued, business leaders began expressing discontent with the lack of public investment and domestic reforms. Which brings up the question on whether or not Merkel's austerity policy is still enough to meet the challenges of a recovering European economy. Many feel that with Germany's crumbling infrastructure, domestic stimulus may be the key for further success in both Germany and across the Eurozone.

At the heart of discontent with the German economy lies the lack of public investments, pricy energy programs, and Merkel's overly cautious agenda — which many attribute to party politics.  Merkel introduced a push for more renewable energy earlier this year, albeit at a price tag that would make most businesses cringe. The goal was the have Germany generating nearly 40% of its energy needs from renewable energy sources by 2025. It is an increase from the current 25% Germany has seen for the past few years. However industries that require large amounts of energy, as well as domestic consumers have faced the brunt economic force such a sweeping policy has imposed. German industries fear that energy expansion would lead to them cutting nearly 800,000 jobs in order to offset the added cost.  The remedy was to exempt the highest energy consuming countries from charges, but many argue that that would place an unfair advantage to those solely doing business in Germany.

Other issues with Merkel are her lack to address the countries aging population and pension plans, as well as her decision to increase the minimum wage to â"šÂ¬8.50 by early 2015. Some argue that such policies have gradually weakened the German economy, decreasing exports by 5.8% from August to July. But with jobs plentiful and the standard of living in Germany relatively high compared to Western Europe, the public seems to not share the level of discontent and scathing criticism of Merkel as do business leaders. A recent poll showed that nearly 70% thought she was doing a good job in managing German Austerity.  Why such stark contrast in satisfaction? The argument most jump to is that Merkel, being a pacifier to the constituency, refrains from exercising her immense power in order to maintain high levels of public approval. Yet that lacks some validity.

Austerity policy in Germany is one of the most revered system of legislation across Europe and the world.  Because of it, a wobbling precariat was able to stabilize itself and reinvest with increased human-capital in German industrial growth. Merkel's small-step, scientific policies are taken with caution because of a fear of recession. Many of the reforms big business and her critics call for may require writing a "blank check" to bail out industries and other Eurozon states which could potentially lead to further economic destabilization. In a speech Merkel gave before the EU-Asian summit in Milan, she warned of no quick fix to the debt crisis encircling the union. Eurobonds needed to invest aren't compatible to the German model and may only add to the climbing debt.

Merkel's agenda is in balancing the budget at home and the challenge for her is offsetting the decade or so of tight fiscal policy and lack of investment in German industry with stimulus. Some economists argue that by increasing spending now, Germany could help support weakness next year as exports and other measures of economic growth have stalled. Essentially, German economic policy — characterized by years of austerity — should begin flirting with stimulus to ease the growing pains at home.  This criticism comes in wake of numbers showing a stall in the German economy: 0.2% decline in GDP in second quarter, and added deficit.

The fear is that the German economy, lacking a stimulus plan, will fall into recession. Investment in infrastructure may be need via a well thought out stimulus package to give the German economy an added boost from the perils of recession. The challenge Merkel faces in the coming months is figuring out how to jumpstart the economy at home as well as maintains stability in the European Union. She has seamlessly weathered her country and the entire Euro-economy through one of the most formidable challenges the continent has faced in centuries. But with pressure from the IMF, decreased yield, and a dwindling German economy, full austerity — while successful in balancing the books in the past — may not be enough at this point in time. Merkel and the Eurozone must not turn to Stimulus to perhaps find the key.