German's Do Not Believe in Expansionary Austerity

While reading some of the comments on a post by Paul Krugman, I came across a comment by someone from Germany that raised some questions that should be answered. The commentator claimed that nobody of importance in Germany believed that austerity would produce economic growth. Austerity was being imposed to placate the bond market. Krugman was wrong to claim a link between austerity and the hope for economic growth. My response is that austerity has worked to decrease economic growth and increase deficits because of falling tax revenues. The bond market has has been concerned about the ability of countries at risk to fund their debt because of their poor economic performance. Countries with good growth prospects have not had to pay higher interest rates to sell bonds.

The commentator also defended Germany against those who claim that it lacks solidarity with its economic partners in the Euro Zone. He said that Texas does not do anything to help California deal with its unemployment problem. He is correct. Texas does nothing to help California. The important point, however, is that California does not look to Texas for help. The US federal government has helped by providing funding to California and other states in need of help. The Federal Reserve has also kept interest rates low in order to encourage investment spending and consumer spending in California and other states.

It was not easy for the US to move from a confederacy of sovereign states to the federal system that we have today. Many political battles were fought, including a civil war over these issues. It might help people to look at US history to understand this better. We were helped by a common language and we did not have to deal with extreme cultural differences, and a long history of conflicts between the states, but it was still not easy. Germany should not be blamed for its concerns. It has to decide whether the benefits of a common currency outweigh the costs, and to determine what the implications might be for the break up of the euro zone.