Europe has to decide: cut or spend

Germany may be fighting a losing battle, economically, with Europe and some of the weaker countries, and for the first time, it may be fighting that battle alone.

With the fall just last week of the Dutch government, which was by and large friendly to the economic path laid out by Germany, and with what seems to be the defeat of Nikolas Sarkozy in next week's French elections, German Chancellor Angela Merkel and her government are becoming increasingly isolated. The likely new French president, François Hollande, has already said that if elected he would re-negotiate the current European treaty, i.e. monetary policy, which sets strict limits on what percentage of debt in relation to its GDP a country can incur when borrowing money. The Dutch government fell because Geert Wilders, a Euro-skeptic, stopped supporting the pro-EU government of Prime Minister Mark Rutte. The government of Romania has also failed for many of the same issues. But beyond the specifics of certain names, places and times a bigger question has arisen. In the age of quick results and instant gratification has Europe and the German model of frugality reached an end after such a short time? After a few years, have the masses of Europe decided to try another way? Even many leading (liberal) American economists have said that the German idea of such tight controls on spending is 'insane'.

Most Germans naturally have a bit of hording in them, and it's very understandable considering their runaway inflation in the late 1920's and the difficult time following World War II. This mentality of never having enough has entered the German psyche and has not loosened its influence since. And here lies the rub. Though the Germans are considered by many to be socialist, it is not as strong as that in Scandinavia, France or the Netherlands. So the austerity measures enacted at the behest of Merkel are a reflection of her constituents and are seen as the 'right way', and also the favored method of dyed in the wool capitalists. But, similarly to Barack Obama's belief that (smart) economic stimulus (spending) in the USA is the way out of its economic problems, some of the most important member country's governments (and their electorate) in Europe believe that the time for cutting has past and that the governments in these damaged economies should look to spend their way out of their problems. Two schools of thought in one entity, the EU, which is beginning to look more and more, like the USA.

Merkel has a solid chance to be a three-term chancellor, and if the last few years are any indication, she would win upon the back of a strong, growing German economy. She is frugal, a hallmark of East Germany where she is from, and it is not difficult for her to preach to her choir to reduce (but in Europe she remains an issue). The biggest problem for her, and Germany, will be the idea that they may have to go it alone, and in the process the EU may break apart, or at the very least restructure or realign. Many Europeans are not ready for Germany to lead the way. The ability of Germany to sell its products abroad has hinged upon the affordable Euro, whose value has been held down by those economies in need of bailouts. Germany, being Germany, will only exacerbate the problem. Perhaps a knight in shining armor (a recovering American economy) may arrive in time to save the German ideal.

To cut or to spend, that will be the question.


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