Germany tackles its own spending problems
Yesterday, German Chancellor Angela Merkel visited the White House. The visit comes as some Euro-zone economies – particularly Greece, Ireland, and Portugal – continue to reel under their massive public debt burden. Germany has largely managed to weather the global recession and finds its economy much more stable than many of its European Union partners.
During the Chancellor’s visit, President Obama urged Germany to take a more aggressive role in controlling Greece’s economic collapse. Worried that a total collapse could send ripples across the Atlantic, the President suggested that some countries in the Euro-zone should provide “a backstop” for Greece. Merkel countered, “If the euro as a whole is in danger, it’s in Germany’s interest — and in every country’s interest — to help. At that point, we will of course take action, but we will act in a way that’s sustainable.”
The ultimate concern is what impact a Greek default would have on the world economy. From Bloomberg:
While the European debt problems have not been a significant drag on the U.S. economy this year, a crisis provoked by a default on sovereign debt could plunge the U.S. back into recession, said Michael Feroli, chief U.S. economist for JPMorgan Chase & Co. in New York.
“We believe Europe will continue to find short-term patches for the situation there,” Feroli said. “If we’re wrong, the U.S. expansion could be at risk.”
While the role Germany should play in Greece’s recovery will continue to be discussed by the two leaders, there are some cues the U.S. can take from Germany to shore up our finances.
In a New York Times op-ed, David Leonhardt examines the steps Germany has taken to shield itself from the devastation of the global recession. To address unemployment, Germany looked to cut out wasteful parts of government and focus on making programs more efficient to encourage finding a job rather than gaming the system.
[I]t’s really possible to make government more efficient. Like much of Western Europe, Germany long had a unemployment benefits system that discouraged work. But almost a decade ago, it began to make some changes.
It cut many benefits, in both duration and level, and it reduced the incentives to retire early. It also began trying to move the long-term unemployed into the labor force.
Specifically, the government took a fresh look at people who had not worked in years to determine who could and couldn’t work. The able and healthy were matched with potential employers. If they took a low-paying job, which was often the case, they would still receive a small portion of their benefits for a time. If they refused to work, their benefits were reduced anyway.
In the United States, short-term jobless benefits are not generous enough to be a major problem. But the Social Security disability program, which is one reason nearly 20 percent of working-age American men are not working, would benefit from some German-like reforms. So would those public sector pensions that encourage people to retire at 55 or 60.
Leonhardt also argues that another way Germany’s economy has remained stable and stands to grow stronger is through taxes. While many also think this should be the case in the U.S., it’s important to keep in mind what drove our economy to the brink. Our record deficits and $14.3 trillion national debt is a direct result of years of overspending, not under-taxing. Furthermore, a closer look reveals how drastically taxes would have to increase to cover Washington’s overspending. Taking this route could have a devastating affect on our already fragile recovery.
Of course there are no simple solutions. But if Washington can learn to budget and spend responsibly, we can start to chart a course to recovery.