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Even Germany isn’t good at German-style austerity

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Over the past year, Germany has been pressuring its fellow euro-zone nations to axe their budget deficits — even if that’s not the sort of thing that, say, the IMF would recommend doing during an economic downturn. But how well is Germany following its own austerity program?

Michael Sohn/AP

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Not very well, reports Der Spiegel. Germany has enacted fewer than half of the spending cuts proposed by Angela Merkel’s coalition government: “Calculations made by the influential Cologne Institute for Economic Research indicate that only €4.7 billion ($6.16 billion) of the €11.2 billion in austerity measures stipulated by the savings package actually took shape in 2011. The government is also falling behind on its targets for this year. Of the originally planned €19.1 billion in savings, less than half has been implemented.”

It’d be easy to call this hypocrisy. After all, Germany has ordered Greece to go through a severe fiscal contraction in order to receive a bailout — a contraction that appears to have crushed the Greek economy, shrinking GDP by 7 percent in 2011, without doing much to reduce overall Greek debt. And, in early March, Merkel berated Spain for trying to slink away from planned budget cuts, even though Spain is facing a 1.7 percent drop in GDP this year, which would make its debt goals impossible to meet. On the merits, there are good reasons to relax austerity during a recessions: The IMF has explained at length how pro-cyclical budget cuts can cause unemployment to skyrocket and tax receipts to shrink further. Greece and Spain are discovering that firsthand. And secretly, it seems, even Germany agrees.

But there’s a more nuanced point here, made by Matt Yglesias. The lesson Merkel takes away from this episode doesn’t have to be that Germany should redouble its efforts to slash spending. Germany has more wiggle room than most euro-zone countries to loosen up its fiscal policies right now. (Greece, by contrast, isn’t exactly in a prime position to borrow money for more stimulus.) After all, Germany’s budget deficit is well-contained at about 1 percent of GDP. And the rest of the recession-bound euro zone could benefit from more German consumption and growth. “It might feel like Germany is under some kind of obligation to engage in solidaristic austerity,” Yglesias notes, “but in reality this would be completely counterproductive.”

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