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Merkel Tells Obama Spending Cuts to Boost Economy, Not Put Brake on Growth

jujuman13

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Merkel Tells Obama Spending Cuts to Boost Economy, Not Put Brake on Growth - Bloomberg

Quote(Chancellor Angela Merkel championed German export strength as “the right thing” for her country, spurning President Barack Obama’s call to boost private spending as both leaders prepare for Group of 20 talks.)

Now if only Obama is willing and able to learn he may yet be able to turn 180 degrees on the damage his idea's on the US economy are causing.

Not holding my breath.
 

donsutherland1

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Merkel Tells Obama Spending Cuts to Boost Economy, Not Put Brake on Growth - Bloomberg

Quote(Chancellor Angela Merkel championed German export strength as “the right thing” for her country, spurning President Barack Obama’s call to boost private spending as both leaders prepare for Group of 20 talks.)

Now if only Obama is willing and able to learn he may yet be able to turn 180 degrees on the damage his idea's on the US economy are causing.

Not holding my breath.
The Chancellor could be correct with respect to Germany's needs. Although spending increases boost aggregate demand, there are levels at which additional risk premia (reflected through higher interest rates) associated with debt burdens can more than offset the benefits associated with spending increases and the resultant increase in aggregate demand. In general, if a country is debt intolerant (markets won't accept its taking on high levels of debt) or faced by growing financing concerns, it can be highly vulnerable to a spike in interest rates.

There comes a point where the rise in interest rates from maintaining a given fiscal policy would lead to less economic growth than an alternative approach that would imposing tax hikes and/or spending reductions. When a country reaches that stage, raising taxes and cutting spending is more compatible to growth than maintaining a fiscal course that is deemed increasingly risky. Tax hikes/spending cuts can increase confidence about a country's repayment capabilities leading to lower interest rates than would otherwise be the case. That, in turn, would translate into lower costs of capital for companies and the government (including a lower risk of default given the somewhat easier debt service requirements). Such lower costs of capital would lead to gains in economic output that would exceed the otherwise typical contractionary impact associated with tax hikes/spending cuts.

IMO, given the fiscal situation in Europe and that area's brush with the Greek debt crisis, it makes good sense for Germany to pursue fiscal consolidation. Some of Europe's highly indebted countries do face an above average risk of deflation and such a development could complicate prospects for austerity program successes.

Barring an unexpected end to the ongoing moderate economic recovery in the U.S., I believe fiscal consolidation should be initiated in the U.S. next year. Fiscal consolidation include both revenue and expenditures, though with greater emphasis on expenditures reductions. It should also include the introduction of a credible strategy that would aim to address the nation's long-term fiscal imbalances with necessary reforms being pursued over the medium-term. Prospects for such fiscal consolidation in the U.S. are not encouraging.
 

American

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By Tony Czuczka - Jun 22, 2010
Chancellor Angela Merkel championed German export strength as “the right thing” for her country, spurning President Barack Obama’s call to boost private spending as both leaders prepare for Group of 20 talks.
Merkel, addressing a business audience in Berlin today, said she told Obama in a phone call that cutting government debt is “absolutely important for us,” exposing a second point of contention ahead of the June 26-27 G-20 summit in Canada.
Reducing the budget deficit by 10 billion euros ($12 billion) per year “won’t put a brake on the world’s economic growth,” Merkel said, relating what she told Obama yesterday. Germans are more likely to spend money if they feel the government “is taking precautions” to ensure solid finances, she said.
Four days before world leaders meet in Toronto, Germany is heading for conflict with the rest of the G-20 over tighter financial regulation, a banking levy and U.S. calls to boost growth rather than cut debt.


This is absolutely precious, since the left wants us to emulate Europe. Merkel is correct of course, but Obama's arrogance will keep his ears shut to this type of advice.
 

Deuce

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This is absolutely precious, since the left wants us to emulate Europe. Merkel is correct of course, but Obama's arrogance will keep his ears shut to this type of advice.
Which parts of being like Europe am I supposed to support now? I didn't get the memo.
 

jujuman13

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Which parts of being like Europe am I supposed to support now? I didn't get the memo.
Oh dear, don't tell me Obama was remiss again with dissemination of information?
 

Deuce

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Oh dear, don't tell me Obama was remiss again with dissemination of information?
I missed the last Liberal Conspiracy Meeting.
It's confusing. There's a lot of countries in Europe with varying laws and financial situations. Which one are we supposedly trying to emulate?
 
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