Germany: Lone Voice of Responsibility

In the midst of a global political panic, evidenced by daily announcements of bailout and money creation schemes, Germany may be the only country still willing to act with some degree of prudence. As the largest European economy, Germany has repeatedly been called upon to lead a continent-wide bailout/stimulus measure. Predictably, the US Government has assumed a primary role as the world's "Urger of Further Bailouts". In the face of large internal and external pressures however, Chancellor Angela Merkel has consistently sounded the most sane with respect to the concept of a Government's fiscal responsibility. We would speculate that the German's attitude is derived from fundamental differences in the economies of Europe and the US, as well the German experience during the Weimar Republic.

The common criticism of the Western European economic model is that the relatively high tax rates tend to stifle economic growth. This is likely true to some degree, however, those higher taxes also create a set of "automatic shock absorbers" via the welfare state during an economic downturn. While the US has already unveiled a stimulus package in excess of $700Billion, it is clear from a quick assessment that the majority of the spending is directed towards items such as aid to states, extending unemployment insurance, and putting an extra $40 a month in everybody's pocket. Given this set of circumstances, we would not expect the Eurozone to announce a comparable stimulus measure, even though the economies of the US and Eurozone are very similar in size. As the leader of Europe's largest economy, Angela Merkel is obliged to act in accordance with this reality.

What we think the German's understand about the current situation is that a nation can not borrow unlimited sums of money. At some point, and as has already happened in the UK, the Central Bank's will have to embark upon a policy of money printing. Now, Germany has experienced a certain economic reality that the US has not: a hyperinflationary depression.

After World War 1, the Germans were forced to pay back a massive amount of war debt. The country had few resources to draw from following the war, so the Central Bank began printing money to repay the debts. The result: the Papiermark/Dollar exchange rate went from 4.2 to 1, to a level of 1,000,000 to 1.

We think it is likely that Berlin has retained some memory of the consequences of aggressive Central Bank money creation, and has thus become quite averse to heading down that path.

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