Thursday, 11 June 2020

FOOD FOR THOUGHT AT THE US FED

The Ugly Side of Germany's 

$1.5 Trillion Stimulus

All over Europe, but notably in Germany, Covid-19 is becoming an excuse to embrace state capitalism.
Stimulating.
Stimulating.
 
Photographer: John MacDougal/AFP via Getty Images
Every now and then during this extraordinary year, it’s good to pause and behold with awe how much has already changed, and how fast. Take Germany. For the past decade, most of the world, including me, has been berating those German tightwads to get over their balanced-budget fetish and spend, spend, spend. Then a pandemic comes along, and suddenly they do just what we’ve been asking for.
And how. Including the latest top-up and ancillary liquidity measures such as guarantees, Germany’s stimulus package to mitigate the economic hit from Covid-19 totals more than 1.3 trillion euros ($1.47 trillion). That’s by far the largest in Europe and even tops America’s, relative to gross domestic product. Kudos to Chancellor Angela Merkel.
There’s no question that this “bazooka,” as Germany’s finance minister calls it, is necessary and good. Nor are the Germans entirely wrong to gloat that their newfound munificence is only possible thanks to their previous thrift, for which they got so much grief. Despite its current largess, Germany expects to exit the crisis with debt amounting to “only” 80% of GDP, up from about 60%.
But wherever medication is given in huge and sudden doses, there’s a risk of unpleasant side effects. In Germany, and Europe generally, one of these may be a lasting shift in governing philosophy from market-friendly policies to state interventionism. That needn’t end in central planning. But even going part of the way would mean buying relief today at the price of misery tomorrow.
The zeitgeist began changing before Covid-19. More than a year ago, Merkel’s economics minister, Peter Altmaier, drafted a “National Industrial Strategy 2030.” In it, he proposed to intervene massively in the economy to coddle national corporate “champions” — with laxer antitrust laws, government equity stakes and so forth. As justification, Altmaier cited a mercantilist and economically rapacious China. For intellectual and political support, he leaned on France.
Altmaier’s idea, it seemed at first, was dead on arrival. His brand of “dirigisme” may be exactly what you’d expect from the French. But it’s completely alien to Germany’s postwar tradition of laissez-faire “ordoliberalism.” Business lobbies balked, as did the Mittelstand of medium-sized, family-owned companies, which often excel in their niches but wouldn’t be crowned as champions. One think tank even warned of “the return of economic nationalism in Germany.” Last fall, Altmaier discreetly softened his plans, then shelved them.
But in March, as part of their coronavirus stimulus, Altmaier and Merkel just as discreetly pulled the plans out again. There it all was, in the fine print: a fund of 100 billion euros to buy stakes in companies and rules to block some foreign takeovers. State aid here, a leg up there. The biggest bailout, at 9 billion euros, is that of Deutsche Lufthansa AG, but the list of others is long and growing. Presumably, these are all now Germany’s “champions.”

A German Bazooka Indeed

Almost half of all state aid to firms approved by the European Commission goes just to Germany
Source: European Commission
Note: Estimated total in state aid of €2.19 trillion. Data from March through June 10.
To be sure, there’s much to be commended in the way Merkel has intervened so far. Her recovery package is probably the world’s greenest. Money will flow to electric vehicles and renewable energy. In contrast to the stimulus of 2008, this one isn’t giving people “cash for clunkers” with combustion engines. And the Germans seem ready to fund anything with the word “digital” in it.
But there’s a difference between praising Merkel for making the best of an unhappy situation and endorsing the underlying logic of letting the Leviathan allocate capital. The arguments against state capitalism haven’t changed since I listed them in the distant pre-modern era — that is, this January.
First, governments tend to confuse a company’s size with strength. Second, they’re usually worse than private investors at spotting winners, and always worse at pulling money out of losers. Third, they turn the economy into a big lobbying competition for businesses, which eventually hurts taxpayers and consumers.
Because the current paradigm shift from market to state is pan-European, moreover, there are also new problems with industrial policy that will increase tension within the European Union. One premise of the EU’s single market was that aid by member states to “their” firms generally isn’t allowed, because it would skew competition. That’s changed.
These days, owing to the pandemic, the European Commission waves through state aid, usually within hours. But not all member states have similarly sized wallets or credit lines. Spain, for example, suffered more from the epidemic than Germany did, and yet it can’t afford to prop up its companies nearly as much. So about half of all state aid in the EU in the crisis goes to just one country: Germany. As one think tank notes with understatement, this will lead not only to even greater divergence but also “to clashes within the EU.”
None of this is meant to deny the need for decisive fiscal stimulus to save the life of the patient, which in this case is the German and European economy. But like any wise doctor, Europe’s leaders, and above all Merkel, must ensure that emergency-room treatment doesn’t turn into chronic therapy. Stimulus, in that sense, is like opioids: Necessary for relief in an emergency, addictive and ruinous if it continues any longer.

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