Germany's hard line on the stimulus: Why Merkel says 'Nein'

Ahead of G-20, German leader balks at more spending and more debt.

By Robert Marquand | Staff Writer

from the March 31, 2009 edition

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Berlin - Angela Merkel, the leader of Europe's largest economy, says no to offering more fiscal stimulus for the ailing global economy.

Ahead of the London Group of 20 meeting, whether this is a bargaining position or a firm principle is unclear. But the German chancellor is the locus of the issue – especially after recent comments that reveal an even tougher stance against further debt and spending.

The G-20, billed as of great historic and practical importance for moving the world economy forward, has steadily inched backwards from the expansive global "New Deal" envisioned by host British Prime Minister Gordon Brown last fall. President Barack Obama is stressing "unity" among the 20 nations that make up 85 percent of the globe's economic output. But the "significant stimulus" called for again this week by the White House has been met in Berlin without joy.

The most significant player now may be Chancellor Merkel, who has become something of a spokeswoman for Europe's view of the crisis, which calls for foregoing more stimulus – though adding cash for IMF protection of East and Central Europe – and stiffer regulation. In recent days, she's applauded Mr. Obama for backing Europe on regulation to stop toxic assets and tax havens, but she continues to say stimulus will not lead to "sustainable growth."

Her position flies in the face of a new World Bank report projecting global economic growth to shrink by 1.7 percent in 2009 – the first such contraction since World War II. The Paris-based Organization for Economic Cooperation and Development expects a 4.3 percent decline in growth for its 30 members.

But Merkel, diplomats say, has combined a profound German instinct against debt – and its accompanying inflation – with a widely held sentiment here that the US and Wall Street are to blame for creating the global crisis. Ahead of German elections in September, the chancellor is also arguing that Europe's social safety net already constitutes enough of a stimulus and a higher percentage of debt than what's been offered by the US and Britain.

"We were living beyond our means," Ms. Merkel said at a meeting March 28. "After the Asian crisis and after 9/11, governments encouraged risk taking in order to boost growth. We cannot repeat this mistake."

Merkel told The New York Times this week that she had practical as well as philosophical reasons for her views. A "massive demographic change" in coming years will shrink Germany's population, she said.

Angling for a 'free' ride?

Diplomats, economists, and officials in Berlin, Paris, and Washington disagree on how Merkel's instinct for discipline, order, and accountability will play out in London. Some argue that Germany will be "more flexible" on stimulus, if the US fully digests the European view on regulation. Others feel her game plan is hardheaded "beggar thy neighbor" competition, relying on stimulus promised by others to boost a German economy now 40 percent based on exports. A global economic uptick by the end of summer would no doubt help Merkel in September's election.

"If we were in a cooperative game, everyone would offer stimulus," says Jean-Paul Pollin, a member of the French Circle of Economists. "But we are in a very non-cooperative game between the European leaders and the US. All Europeans are waiting for stimulus from outside.… Germany's best solution is to wait for the US, France, the UK, and others for a big stimulus that will help exports."

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