A funny thing happens anytime you say Germany should spend more money on its own economy. People start shrieking that it shouldn't have to keep bailing the rest of Europe out, or that it wouldn't do any good anyway. It's bizarre.
Now, as far as I can tell, there are two distinct anti-spending groups: the austerity proponents, and, well, the Germans. (And no, that's not completely redundant). The first thinks that debt is always and everywhere a bad thing, even when you're using it on stuff you need — like roads, bridges, and schools. They tend to say things like, It's responsible to only spend the money you have, and not incur debt.
This is the old government-as-a-household fallacy. There are plenty of times when it makes sense for a family to borrow money—like for college—to, yes, invest in its future. And that's even more true for governments, which, unlike households, can borrow for almost nothing, never have to pay back what they owe, and can print money.
More sophisticated are German economists. They at least acknowledge that debt can be useful, but quickly denounce the idea that it would be useful right now. Otmar Issing, the former chief economist of the ECB, doesn't think that Germany needs any more spending since it "enjoys near-full employment," "its growth is above, or at least near potential," and "monetary policy is extremely loose."
The only problem with this analysis is ... everything. In reality, Germany's economy shrank at an 0.8 percent annual pace in the second quarter, its exports and industrial production are still falling at alarming rates, and it only has 0.8 percent inflation, hardly what you'd expect if money were really too loose.
Germany, as I've said before, has a Germany-not-spending-enough-money problem. It's only covered that up by stealing demand from the rest of the world. But, as Centre for European Reform chief economist Christian Odendahl points out, Germany really has a Germany-not-spending-enough-money-on-infrastructure problem. After accounting for wear and tear, the government's net investment in the economy has actually been negative for the past 12 years. That means, now that investors are paying it to borrow over two years, there never has been and never will be a better time for Germany to build the roads and bridges it needs to keep its economy growing in the future.
Europe, of course, also has a Germany-not-spending-enough-money problem. And that's where the confusion comes in. The rest of Europe, you see, needs Germany to be the economic buoy that helps lift them out of depression. But Germany hates, just hates, being told that it has to spend more for the good of Europe. So German economists come up with all these semi-elaborate excuses why more German infrastructure spending actually wouldn't help anybody else, which just isn't true. Sure, it might not boost exports for the rest of Europe, but it would boost German wages—which would spill over, and take pressure off other countries to actively cut theirs.
The real issue, though, is the precedent more spending would set. One official who met with Angela Merkel said she had decided to stick with austerity, because "if Germany deviates from its fiscal position, it would give other countries a reason to do likewise." In other words, Germany won't spend more, even though it needs to, because it's afraid that would give the rest of Europe a license to spend more too. (Sorry, 0.1 percent of GDP more of infrastructure spending doesn't count). And what's why you see the wacky argument that Germany spending money on itself would be something akin to a bailout for Europe.
German economic policy is the haunting fear that somewhere, someone may be breaking a budget rule. This Puritanism is hurting Germany's economy, and keeping Europe stuck in an even Greater Depression too.