Merkel Exports Recession Concern as Germans Sleep in Trade Boom

July 26 (Bloomberg)--On a late June afternoon in Berlin, Germany’s Angela Merkel has come to the main conference hall in the Chancellery building to deliver a stark message on the need to reduce budget deficits. “If there’s another crisis, we won’t be able to pay for it unless we get onto a path of sustainable growth,” says Merkel, her hands resting above the national eagle emblem on the lectern.

While the deficit in Germany, at about 4.5 percent of gross domestic product this year, is smaller than those in most euro zone countries, the chancellor is not satisfied, Bloomberg Markets magazine reports in its September issue. The road to prosperity begins with austerity, she says, and Germany will show its neighbors how it’s done. On July 7, her government authorized budget cuts and tax increases totaling 81.6 billion euros ($103.8 billion) for 2011 to 2014. Merkel, 56, promises to shrink the budget gap by 2013 to the threshold of 3 percent of GDP that European Union rules demand.

The rest of Europe has begun to heed Merkel, a former university scientist brought up in communist East Germany who has been chancellor since 2005. The leaders of France and Italy have pledged deep spending cuts to get their deficits down to the EU limit within the next three years. Spain aims to halve its budget shortfall to about 6 percent of GDP by the end of 2011.

‘Protracted Recession’

Merkel may be forcing other euro zone leaders into a big mistake, says Niall Ferguson, a professor of history at Harvard University. “In leading by example on fiscal austerity, she may propel Europe into a protracted recession,” says Ferguson, author of “The Ascent of Money: A Financial History of the World” (Penguin, 2008). “If we all behaved like the Germans and tried to balance our budgets simultaneously, the result would be a collapse in global demand.”

Billionaire investor George Soros also criticizes Merkel’s insistence on fiscal rectitude: “Germany cannot be blamed for wanting a strong currency and a balanced budget, but it can be blamed for imposing its predilection on other countries that have different needs and preferences,” he said in a speech on June 23 at Berlin’s Humboldt University.

Merkel demanded that other euro zone countries show they are willing to rein in their budgets as her condition for the bailout in May, which eased concern about a default by Greece and contagion across the region. In the end, after hesitating for months, Merkel put German taxpayers on the hook for 148 billion euros out of the 750 billion euro rescue package.

German Interests

She earned mostly grief at home for her decision. “She hasn’t defended German interests,” says Monika Mewes, 65, a pensioner in Frankfurt. “I would have let Greece go bankrupt.” Mewes is a former clerk in the credit department of Germany’s central bank. Fifty-one percent of Germans want to quit the euro and return to the deutsche mark, according to a poll by Ipsos GmbH published on June 28. Support for Merkel’s ruling coalition is down 14 points since national elections in September 2009 to 34 percent, a July 21 poll for Stern magazine found. The discord at home comes even as Germany’s economy will grow 1.4 percent this year, according to government estimates, after shrinking 5 percent in 2009.

The key to Germany’s rebound is its status as the world’s second-largest exporter, after China. The euro’s 14 percent drop versus the dollar in the first five months of 2010 made German goods cheaper to sell abroad. Exports surged 11 percent in that period, compared with a year earlier, to 80.8 billion euros. More recently, amid signs that governments will muster the budget discipline Merkel seeks, the euro has begun to recover.

‘Showing Its Strength’

As of July 23, the euro traded at $1.29, down 10 percent for the year to date. Steffen Kampeter, Germany’s deputy finance minister, is proud that his country’s goods are in demand. “Our growth model, based on exports, is now showing its strength,” he says. Outside Germany, though, the reliance on external demand over internal consumption stirs resentment. “Germans must learn to grow their economy without depending on exports,” says Charles Dumas, chairman of Lombard Street Research Ltd., an economics advisory firm in London.

German consumer spending fell 0.8 percent in the first quarter from the fourth quarter, according to government data, compared with a smaller 0.1 percent drop across the euro zone.

Foot-Dragging

The reluctance of Germans to spend puts the country at odds with the rest of the region, says George Magnus, a senior economic adviser for UBS AG in London. “Germany is a big savings nation because other countries are big borrowers,” he says. “If everybody tries to be like Germany, the whole euro zone will fall apart.” The foot-dragging before Merkel agreed to support the sovereign-debt bailout -- and similar hesitancy prior to joining the stimulus efforts of the Group of 20 nations in 2009 -- is typical behavior, says Thomas Gauly, an adviser in the 1990s to Chancellor Helmut Kohl.

In 1990, Merkel was elected to Germany’s first parliament after reunification. Kohl assigned Gauly to give the rookie legislator coaching in democratic politics. “She asked me, ‘What kind of literature do I have to read to understand West Germany?’” recalls Gauly, now a partner in Frankfurt at the public relations company CNC AG. At the top of Gauly’s reading list was “The Discovery of Slowness,” a novel published in 1983 by Berlin writer Sten Nadolny that celebrates the merits of being deliberative.

Methodical Style

Merkel’s aides say she maintains a methodical style today. “She normally needs some time to study a problem,” says Peter Altmaier, deputy parliamentary whip of Merkel’s Christian Democratic Union. “She’s sometimes criticized for being rather late, but in her view it’s better to find a balanced approach.” Merkel’s advocacy of sound national bookkeeping and her caution fit with every German’s dread of inflation fueled by unchecked public spending, Altmaier says. “The experience is deeply rooted in our collective memory,” he says.

In 1923, the currency plunged to a rate of more than 4 trillion marks to the dollar as the country’s financial system buckled under World War I reparations. Germany suffered a second round of hyperinflation after 1945, with public debt from the Nazi period equaling almost four times Germany’s annual output prior to World War II. Merkel’s slow, cautious style may be partly to blame for her failure, so far, to reap any political dividend from the strengthening German economy, Gauly says.

The chancellor is sticking to her tough economic message -- and trying to get some credit. Speaking to reporters on July 21 in Berlin, she called Germany’s economic recovery “powerful.” “Germany and its way of grappling with these issues have earned recognition,” Merkel said. “The state has proved itself to be capable of handling the crisis.”