Well done Mrs Merkel

Let me say a few words in praise of Germany.
I am glad Mrs Merkel has better things to do with her time than attend the grandstanding “Save the world” session with the UK and France today.
I am glad she has avoided mock reflation based on massive borrowing. The UK plan to borrow more to pay for a VAT cut has backfired badly. Maybe Mrs Merkel understands that if the money is borrowed from nationals, there is very little reflation. The extra savings made by individuals and companies to lend to the government cannot also be spent by the savers, so it offsets much of the benefit of the extra spending by the government. Clearly she understands that this year’s reflation on public borrowing is a future year’s tax increase when you have to start repaying the debts.
Germany has fought its way back from over borrowing to finance the reunification. It has maintained some very good engineering based industries, and built a large balance of payments surplus. Mr Brown’s strategy of treble deficits, where everything rests of borrowing, is not going to prove as robust a model as the German one. Germany’s reluctance to join the others today should be taken as an opportuntiy to rethink the UK strategy, which is taking far too much risk with the public accounts.

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8 Comments

  1. Clare
    Posted December 8, 2008 at 5:35 pm | Permalink

    My admiration for Frau Merkal grows by the day. It must be unbearable to lectured by a man who has done a great deal to bring about the current dire economic situation.

  2. mikestallard
    Posted December 8, 2008 at 5:44 pm | Permalink

    I notice, in today’ Telegraph, that the UK economy has fallen behind France and is set to tumble down past even Italy.

  3. David B
    Posted December 9, 2008 at 5:12 am | Permalink

    Good. I was beginning to think it was just me who thought the Germans had got it right.

  4. rugfish
    Posted December 9, 2008 at 8:42 am | Permalink

    I don’t have a lot of time for Merkel personally but I have a whole lot less time for Barroso and Sargozy who together are engineering a second referendum in Ireland.

    For Brown, I’m afraid he’s lost all hope of ever convincing me that a VAT cut costing taxpayers £12 billion, is better than an income tax cut which would otherwise have gone straight into people’s pockets and out again into banks and shops up and down the same high streets which wait for depositors and sales.

    Plainly, it all ends up back in the bank any way so it makes no sense at all not to include taxpayers in his bail out plans when after all is said and done, we are paying for it.

    Tax cuts would also go a long way to helping people keep their homes, and it would also rebalance the incomes of those like me who have taken significant reductions of income on their savings, neither of which will have ‘confidence’ to go spending their non-existent VAT reductions down the high street but may have done if they’d had pound notes in their pockets.

    Grandstanding is a word I think fitting but is perhaps a little more polite than I’d describe it at the moment.

    (followed by negative comments on Mr Barroso)

  5. Michael Taylor
    Posted December 9, 2008 at 10:20 am | Permalink

    Why has no-one pointed out the way in which Ricardian equivalence is likely to scupper any ‘reflationary’ impact of government borrowing? Japan’s experience of the last decade has shown repeatedly and convincingly that if a government messes up the public finances so much as to scare the population about its future prospects, no amount of public spending can restart the economy. Because, under Ricardian Equivalence, the population looks at the current fiscal ‘stimulus’ (in Japan’s case, building roads & bridges to no-where), and concludes ‘crikey, what’s the hospital and/or pensions system going to be like in a few years time’ and adjusts its consumption/savings schedules accordingly.

    In Japan’s case, ‘reflation’ was tried throughout the 1990s, and was always subverted (very sensibly) by the Ricardian equivalence response. It wasn’t until Japan got a PM (temporarily) determined to get a grip on the deterioration in the public finances that the Japanese consumer (temporarily) came out of hiding.

    Frankly, I don’t see how such an irresponsible assault on our national finances as that proposed by Mr Brown can possibly not scare the hell out of people about our future prospects. If so, the ‘stimulus’ cannot possibly succeed in its own terms.

    The alternative is simple but hard: strive mightily to secure the national finances in the face of great obstacles; rescind as much red tape as possible (ie, as much supply-side reform as humanly possible, in order to bolster return on capital); and generally provide an environment in which long term yields can go down, and return on capital go up. Only thus can cashflows return to the positive, and our balance sheet issues start to be corrected.

    Frankly, I look on what Mr Brown etc is doing as either colosally stupid & ignorant, or as almost maniacally reckless. (more negatives deleted…)
    I tremble for my country.

  6. Harry E
    Posted December 9, 2008 at 10:39 am | Permalink

    Yes, without a doubt the German finance minister has the right of it.

    I have no time for the Europe that has come to be, so have no time for the “grandstanding elites”. I do however mourn for the Europe that might have been: and count the political maneuvering and the twists and turns that have brought the EU to be no more than an unelected and unaccountable despotism, or even a collective dictatorship, a tragedy of the forst order. What an opportunity has been missed.

  7. Mark M
    Posted December 9, 2008 at 2:11 pm | Permalink

    John, why is it you, and not the shadow chancellor, who is applauding Mrs Merkel?

    The German solution will show Mr Brown and the rest of the spendthrift loonies that you cannot force people to spend when you have no confidence in the future.

    We are going to spend vast billions that we don’t have, and to very little effect due to the benefit disappearing for fear of future tax rises.

    Why, when Brown accuses you of being a ‘do nothing’ party, do you not stand up and point out that doing nothing is a perfectly reasonable thing to do?

    No-one knows that this bail-out will work. If it does not, what then? We will still have the same problems but even less money. Where is the opposition to this government?

    Please get Osborne clued up, and let’s show Labour up for what they are.

  8. Rare Breed
    Posted December 9, 2008 at 3:26 pm | Permalink

    The biggest problem is that much of the reglation that we would like to rescind, is required under various EU directives that we have signed up to.

    Without coming out of Europe we would be in breach of many commitments made and therefore liable to fines from the EC.

    I know what I would do, but has smiley dave got the will and determination of his flame haired predeccessor??

    I am not convinced.

    All we know is that they “will not let things stand”. Hmmmm.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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