Heroic, unapologetic, deadpan, frugal, and a bit unpolished, Angela Merkel — or “Mutti” [Mummy] as the Germans have come to know her — has gradually captured the infatuation of the international community since her election as German Chancellor in 2005. Part of it is her seemingly unattached, yet decidedly cautious approach to the Eurozone, and part of it is her scientific handling of German austerity policy, which has positioned her nation as one of the more stable European economies in the ongoing crisis. But with recent economic turbulence domestically and abroad, is the use of austerity subsequently retarding the growth of the world economy?
From the past fiscal year, evidence has indicated that the German economy—the largest in Europe—is stalling. Given that Germany has more or less directed the European economic recovery over the past decade (issuing loans and bailouts to nations such as Greece), the scrutiny stems from the fact that what happens in Germany is felt across Europe. Many see Merkel as the de facto head of the Eurozone, and Germany its future. It would be advisable, therefore, to apply any remedy possible to keep this leading economy from stalling.
The issue centers on the age-old economic debate between stimulus and austerity. For over a decade, Merkel has crafted austerity policy in Germany, levying efficient taxes, reinvigorating industrial productivity, and reinstating flexibility in the German labor economy. But as export revenue and economic growth started to decline, business leaders began expressing discontent with the lack of public investment and domestic reforms, bringing up the question of whether Merkel’s austerity policy can meet the challenges of a recovering European economy. Many feel that with Germany’s crumbling infrastructure, domestic stimulus may be the key for further success in both Germany and across the Eurozone.
Among the most salient issues is the cost of Merkel’s energy programs. Earlier this year, she introduced a push for more renewable energy — but at a price that would make most businesses cringe. Although the plan was to have Germany generating nearly 40 percent of its energy from renewable sources by 2025, domestic industries and consumers have bore the brunt of this policy. German industries fear that energy expansion would force them to cut nearly 800,000 jobs in order to offset the added costs.
Other prominent issues include the need to address the country’s aging population and pension plans, as well as Merkel’s decision to increase the minimum wage to €8.50 by early 2015. Some argue that such policies have gradually weakened the German economy, decreasing exports by 5.8 percent. But with jobs plentiful and the standard of living in Germany relatively high, the public is less inclined to share the same level of discontent as business leaders. A recent poll showed that nearly 70 percent of the public believed that Merkel was properly handling the economy.
Austerity in Germany is one of the most revered set of policies across Europe and the world. Because of it, a wobbling precariat was able to stabilize itself and reinvest with increased human-capital in German industrial growth. Merkel has been reluctant to alter her incremental policies for fear of recession. Many of the reforms demanded by big business and other critics entail writing a “blank check” to bail out struggling industries and states within the Eurozone, which could potentially destabilize the economy. In a speech Merkel gave before the EU-Asian summit in Milan, she warned of no quick fix to the debt crisis encircling the Union.
Merkel’s agenda is to balance the budget at home and so the challenge for her is to offset a decade of tight fiscal policy and lack of investment in German industry with stimulus. Some economists argue that by increasing spending now, Germany could help mitigate weakness next year in light of stagnating exports and economic growth. Essentially, German economic policy — characterized by years of austerity — should begin flirting with stimulus to ease the growing pains at home, particularly after a 0.2% decline in GDP along with added deficit.
The fear is that the German economy, lacking a stimulus plan, will fall into recession. The challenge Merkel faces in the coming months is figuring out how to jumpstart the economy at home while maintaining stability in the European Union. She has managed to guide her country and the entire European economy through one of the most formidable challenges the continent has faced in recent history. But with pressure from the IMF, decreased yield, and a stalling German economy, full austerity — while successful in balancing the books in the past — may not be enough at this point in time. The solution is stimulus.