German outlook not good: Why did they wait so long for expansionary measures?

Not a good sign for Euro-zone growth in the third quarter. Its biggest economy – Deutschland – is expected to decline in the third quarter, following a -0.5% contraction in the second quarter. From Deutsche Welle:

Zero — that’s the amount of growth five leading economic institutions say Germany can expect in 2009. They recommend more deficit spending, but can that turn around an economy on the verge of recession? People were expecting the report issued on Wednesday, Nov. 12, by the “five wise men” — as the German Council of Economic Experts is known colloquially — to be bleak. And it lived up to its advance billing.

“The shock waves emanating from the financial crisis have fully hit the German economy,” wrote the experts at the beginning of the report. “After a surprisingly good start in the first quarter of 2008, the situation has become so gloomy that Germany is on the edge of recession.”

Germany experienced negative growth in the second quarter of 2008, and if data to be released on Thursday confirms that the economy shrank in the third quarter as well, Germany will officially be in recession. And the new year, the experts said, won’t bring any immediate relief.

“Gross domestic product may have increased by 1.7 percent in the ongoing year, but 2009 will bring stagnation in economic output,” the Council concluded.

The Council put the blame for the economic downturn squarely on financial markets inside and outside of Germany. Although the property market was nowhere near as overheated as in the US or Britain, for example, the experts saw no chance that the German economy could escape the negative pull of the global financial crisis.” Rebecca here. And a little later in the article, the Germans catch on to the benefits of “expansionary policy,” but it is too late. This follows up what I was saying this morning in Trichet got it wrong; well, you can tack on “Merkel got it wrong, too” as Deutsche Welle further reports: “On the issue of economic stimulus, the experts reversed the trend of recent years and said Germany should no longer prioritize a balanced budget. Instead, the experts recommended, Berlin should try to stimulate internal consumer demand and pump money into public-works projects.” Rebecca here. As you all know, I am not a fan of deficit spending because it is not likely that the government will pay it back when the economy expands again (at least in the U.S.). However, if expansionary fiscal policy is the measure that the government is/was going to take, why wait until the economy is already in the tanker? It takes time for expansionary fiscal and monetary measures –the ECB lowering its target rate (increasing the monetary base) and the government spending more on goods and services – to pass through to the economy. These measures will certainly help the German macro-economy, but Europe’s policy responses have sentenced the Euro-zone countries to a prolonged recession.

Originally published on November 12, 2008 at News N Economics and reproduced here with the author’s permission.