Schäuble's 'Secret' Austerity Plan

A few days ago German news magazine Der Spiegel reported on a 'secret' plan by German finance minister Schäuble to introduce an austerity budget for  Germany once next year's election is out of the way. Of course this is what we might term an “open secret” for a number of reasons: for one thing, Germany has been in violation of the Maastricht treaty debt limits for quite some time, not to mention the new “fiscal pact” limits, which are even more strict (and will ultimately prove just as unenforceable).

Secondly, anyone looking at Germany's public debt mountain could be forgiven for feeling slightly vertiginous. As we have previously discussed, while everybody expects Germany to bail out the fiscally incontinent weaker euro area sovereigns, it actually lacks the means for doing so.


In fact, if we take demographic trends and unfunded liabilities into account, then it would be no exaggeration to declare Germany just as insolvent as every other European welfare state. As Der Spiegel correctly points out, German politicians are no different from democratic politicians elsewhere – they buy votes by generously spending money they don't have. The pertinent passage reads:


“The paper by the Finance Ministry officials contains a further admission. The next finance minister will have to make up for what Schäuble has failed to accomplish. Merkel's most important minister forced half of Europe to submit to austerity measures while the Germans were spending money hand over fist at home.


The political process that preceded each jump in spending was always the same. Schäuble grumbled audibly, but ultimately agreed.

No wonder the opposition now accuses him of having failed. "The increased revenues from the economic recovery were not completely used to reduce deficit spending," says SPD finance expert Carsten Schneider. "This government demands harsh austerity measures from other European countries," he argues, "while it lavishly spends its own tax revenues."


(emphasis added)

We should add here that while the SPD's “finance expert” is quite correct with his assessment, his own party would have spent Germany's tax revenues just as lavishly, if not more so. It is simply an inherent fault of democracies that their career politicians exhibit extremely high time preferences with public funds. From their own point of view, in terms of their personal career advancement,  it is the only thing that makes sense. How else would they go about buying votes? As Mencken once said, “Every election is a sort of advance auction of stolen goods”. German socialists are most definitely not what one could term exceptions from the rule.


The Welfare State Reaches its Limits

However, the euro area's debt crisis has concentrated a few minds here or there. Even though the political process almost ensures that the ship will eventually run aground, politicians have now for the first time in a long time been confronted with the limits to “business as usual” in the welfare state. Schäuble no doubt occasionally casts a wary eye in the direction of the growing breakdown of the system in Greece and elsewhere. Schäuble also realizes that Germany's public debt mountain is only one more severe economic crisis away from moving into “immediate crisis territory”.

One rarely discussed feature of these breakdowns  – but one we always point out, because it strikes us as extremely important – is that people have partially lost the ability to help themselves and are moreover kept from doing so by a veritable jungle of regulations and taxes that are hampering the market economy.  Mises will once again be proven right – he always insisted that there is no third way, that there can be no “mixed” economy. It is either capitalism or socialism. One cannot have both, and the latter cannot possibly work (due to the socialist calculation problem, which is insoluble).

This is actually the message from the crisis: the imaginary “social market economy” has failed, because it puts too many obstacles in the way of capital accumulation and in the end consumes more capital than it produces. It is of course the case that even a severely hampered market economy is better than no market economy at all. It can muddle through for a very long time, and just as an economic boom based on credit expansion can produce an illusion of prosperity for a good while, it can appear to work for some time. However, the end is inevitable and preordained. It is certainly not something anyone wishes for, given how thin the veneer of civilization often proves to be. But we cannot realistically expect an ever smaller number of ever more burdened producers of wealth to be able and willing to produce increasing wealth for everyone – it is just not possible.



Wolfgang Schäuble plotting austerity

(Photo source unknown – The Web)



Lagarde's Misguided Complaint

Christine Lagarde was evidently alarmed upon hearing of Mr. Schäuble's deficit and debt cutting plans, as she popped up like the proverbial jack-in-the-box this week to lodge her misgivings. How come it is so uncritically accepted that prudent fiscal policy automatically means less growth? This doesn't make any sense, given the fact that no government has a single red cent in resources that it has not first taken in some shape or form from the private sector. Whether it does so by taxation or by borrowing is completely irrelevant – the fact is that all that is altered is who will dispose of the existing resources. Nothing, nada, zilch, is going to be added to them by government spending. All that is likely to happen is a misdirection of said resources into economically wasteful activities and projects.

Der Spiegel reports:

“International Monetary Fund head Christine Lagarde has said that Germany should not be looking at measures aimed at consolidating its finances, apparently in concern over a SPIEGEL report indicating that the German Finance Ministry is working on a far-reaching package of spending cuts and tax hikes for introduction following general elections next autumn. In an interview with the Thursday edition of the influential weekly Die Zeit, she said that Germany needs to continue to work as a counterbalance to the biting austerity programs passed in crisis-stricken countries in Southern Europe.

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."

The comments come just days after SPIEGEL reported that Finance Minister Wolfgang Schäuble is working on a list of consolidation measures.”


(emphasis added)

She has half a point, insofar as Schäuble's 'secret' (ahem) plans also include tax hikes. This is also a major failing of the austerity measures elsewhere in Europe. Not one of the governments now pursuing fiscal austerity has done so by merely cutting spending. In many cases the burden on the economy has actually been added to, as tax increases exceed spending cuts. The aim is to leave the State at a minimum frozen at its current size. No shrinking of the bureaucratic and political apparatus is contemplated anywhere.

Naturally, politicians are also loath to decrease the amount of goodies the State is able to dispense, so as to keep the vote buying channels open so to speak. It is only when the situation is extremely dire that such options are considered.

The greatest failing of all is however the reluctance to introduce bold market-friendly reforms.  The prime example for this failure remains Italy, where Mario Monti's labor market reform attempt was in the end watered down so badly that he might as well not have bothered. In a way it is even worse with what passes for “reform” in France so far, but then again we cannot possibly accuse Mr. Hollande of even trying. 

Mrs. Lagarde shouldn't be worried so much about a possible German fiscal austerity course, she should be far more worried about the regulatory and taxation straightjacket that is smothering the entrepreneurial spirit everywhere in Europe.




Christine Lagarde finds Schäuble's secret austerity plan for Germany lying around on his desk …

(Photo source unknown – The Web)




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2 Responses to “IMF’s Lagarde Gets Worried About German Austerity Plans”

  • ab initio:

    There is not much attention paid to Germany’s ability to actually fund all the PIIGS bailouts. Their debt/GDP is closing in on the 90% Reinhart & Rogoff line. And they have yet to recapitalize their banks! Note the ratio of banking assets to GDP and the picture becomes a lot clearer.

    No wonder what has happened in EMU is a giant circle jerk. Insolvent governments placing their bonds with their insolvent banks; who in turn place those bonds as collateral for free money aka loans from the ECB; and the debt of the insolvent banks are guaranteed by their insolvent government.

    Reality is stranger than fiction. Writers of history will have a field day when writing about the current period financial schemes.

  • Crysangle:

    ‘The pump don’t work ’cause the Vandals took the handles’ .

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