No Drama Angela

The global economy is facing dire straits — and Germany’s first woman Chancellor, Angela Merkel, is being criticized abroad, but also at home for not doing enough on the economic front.

Pressure is mounting on all sides, even within her own political ranks, to change her course toward tax cuts and other expansionary measures to stimulate the economy. However, Merkel has steadfastly refused to give in to these pressures. As she sees it, it isn’t useful “to take part in a competition to outdo one another with an endless list of new proposals, in a senseless contest over billions.”

Merkel and her finance minister, Peer Steinbrück, are convinced that the responses to the challenges ahead need to be measured, and that this approach will not include significant tax cuts now.

The goal of trying to achieve a balanced budget appears at first glance to be a good plan for a country that enjoys a current account surplus and has options to respond further as the situation requires.

With so many conflicting assessments swirling around seeking to explain both the sources and the solutions for the financial mess we are all in, both Merkel and Steinbrück are relying on their instincts as much as their analysis to respond.

Neither is interested in what they deem populist responses peddled elsewhere. While these might appear dramatic, in the end they may serve only short-term purposes — and trigger truly negative long-term consequences, among which is increasing debt down the road.

Their confidence and ability to keep cool has roots in two things: history and experience. As in the United States, Germany is looking to the Great Depression of 80 years ago and the lessons learned at that time.

Take the decision to guarantee all personal savings accounts for Germans. Merkel and Steinbrück based it on a correct reading of the German public, which puts a premium on the safety of its savings accounts — and needed to be assured that there was no reason to start a run on the banks.

By the same token, enacting large stimulus packages — which may or may not encourage German consumers to open their wallets to buy things and therefore get the economy going again — has to be viewed against the backdrop of hyperinflation, such as that experienced in the early 1920s.

While an ever-smaller minority of Germans has a living memory of those events, they still influence economic policy debates since they are very much part of the national collective psyche (which, coincidentally, also explains Germans’ general reluctance to invest in the stock market).

Finally, there is the record of the last 60 years of the Federal Republic’s success of keeping confidence in the government at a high level by virtue of keeping its own economic house in relatively clean order.

Germans widely view this as a prerequisite for continued confidence in future consumption and investment. Accordingly, they see a solid budget, along with price stability and low inflation, almost as a holy grail.

From the outside looking in, it might appear that Germany is trying to protect its own national interests at the cost of others. If people continue to buy German exports, things will be fine — for Germans.

But if the Germans start consuming again, including increased imports from other nations, the impact would not only be felt in Germany. The overriding question, though, is what sets that particular development in motion?

Merkel’s answer, based on her reading of her fellow Germans, is that they will respond to another type of stimulus than the ones being deployed in the United States, United Kingdom or France.

And that stimulus seems to her to be maintaining confidence in a government which is following a sustained course toward a balanced budget, no matter how long it takes.

Her answer, therefore, is Obama-esque in nature: no drama, rather more emphasis on a disciplined, well thought-out approach. If Germany stays the course, then this large anchor of the European Union’s economic strength will help lift other boats as well in the longer run.

To people who follow German developments over the years, there is a familiar ring to this. Chancellor Helmut Kohl earned a reputation for wanting to wait things out without requiring a major political overhaul. Chancellor Gerhard Schröder wanted to be known as the “steady hand” in times of crisis, thinking about the long run.

True enough, there is a chorus of voices aimed at Merkel and Steinbrück critical of their approach. They argue that right now there is a much greater risk in trying to hold the line, as the German government prefers to do.

But as Chancellor Merkel put it herself, there is no script available in dealing with this crisis. Part of her sentiment may be rooted in John Maynard Keynes’s famous dictum about the long run — that we all end up dead.

In addition to core lessons from German economic history, this may explain best why Merkel and Steinbrück have chosen to stick to their guns for now. Still, the question remains: Do they have the right ammunition in those guns to take down the challenges ahead, in the short and the long term? And if not, with what and when will they reload?