Business, Finance & Economics

The German perspective


Sorry, President Obama. Don't expect Germany's Chancellor Angela Merkel to pledge another stimulus package at the April 2 G20 meeting in London.

Ahead of the summit, Merkel has repeatedly rejected calls by Washington to spend more public money in Germany as part of a coordinated stimulus for the world economy.

"The crisis did not come about because we issued too little money, but because we created economic growth with too much money, and it was not sustainable growth," she said in a recent interview with the Financial Times.

Instead, Merkel is expected to push the German view: tightening regulation of financial markets, strengthening the role of the International Monetary Fund, and calling for a clear statement against rising trade protectionism.

Merkel's response to the world economic crisis has earned her the nickname "Madame No" in
the media across Europe. But to understand Merkel's hard line on spending, you need to understand German history, psychology and, of course, politics.

Fiscal conservatism in Germany — and fear of inflation — runs deep in Europe's largest economy. Indeed, the two are ingrained in the German psyche after hyperinflation in the 1920s wiped out the savings of most Germans. In December 1923, one dollar was worth 4.2 trillion marks. This hyperinflation was an economic calamity that paved the way for the rise of the Nazi party.

So saying no to more spending, and — indirectly — no to inflation, keeps Merkel's support among Germans high.

But is it the right decision for Germany, and for the rest of the world? Not according to most economists, and even some German business leaders.

Ahead of the meeting in London, a big wake-up call came from the OECD  (the Organization for Economic Cooperation and Development). The Paris-based think tank is forecasting Germany's biggest economic decline since World War II. Gross domestic product could shrink this year by 5.3 percent. Exports, the engine of Germany's economy, are expected to plunge 16.5 percent.

A few hours before that report, there was even more bad news: German unemployment hit 3.6 million in March, giving the country a jobless rate of 8.6 percent. The OECD predicts that number will rise to more than 11 percent in 2010.

So it's urging Berlin to boost its stimulus measures. Fast.

But so far, Chancellor Merkel has refused. As she points out, Germany has already pledged 80 billion euros ($110 billion) in stimulus money over two years, which amounts to 3 percent of gross domestic product.

While this puts Germany in the top league of the big spenders — only the U.S., China and Saudi Arabia are spending more — the chief economist of the OECD thinks there is room for more.

Merkel says she wants to wait and see if the stimulus packages already in place are showing any signs of success. She also says the country's strong social safety net makes an increase in government spending unnecessary.

But confronted by this daily changing global downturn, "Madame No" might have to find ways to say yes to more stimulus spending soon. Especially since she is up for reelection in September.

And again, Germany's past could be its guide.

In the summer of 1933, government leaders and their finance ministers also met in London to discuss a different global economic crisis. When they parted they had achieved little, and every country went home to deal with the crisis in its own way. The rest, of course, is very dark history.

Merkel knows inaction is not an option. So standing next to Russian President Dmitry Medvedev in Berlin before heading off to London, she said this would only be the first of more meetings to come.

Karoline Durr is a writer in New York and Berlin. She has covered European business and economics for CNN, CNN International and Bloomberg.

Read more GlobalPost dispatches about the G20:

G20: A helpful guide to saving the world

How to host a G20 summit