Steinbrück Reductio

Peer Steinbrück, Germany's finance minister, has received uncharacteristic attention in the British press for his claim that Gordon Brown has been "crass" in abandoning fiscal prudence (BBC). In the UK, the Tories have been entirely characteristic in jumping on the bandwagon.

I suspect that Gordon Brown is not too far off the mark when he claims that this is just "internal German politics". However, Mr. Steinbrück's criticism probably has more to do with Eurozone politics. At the moment the Euro is balanced on the Franco-German fulcrum of President Sarkozy's newly minted Keynesianism and Chancellor Merkel's fiscal restraint. The decline of sterling probably weighs heavily on the minds of Germans worrying what happens if that axis tilts too far Sarkozy's way. It's also worth observing that Germany currently has substantially higher level of public debt than the UK, even if it is currently running a surplus and paying that down.

Mr. Steinbrück is wrong (as are the Tories). A dramatic loosening of fiscal policy is required to stimulate the economy. But he is right, as Vince Cable has pointed out, that a VAT cut is a very poor way of implementing that loosening.

I've harped on about this before but it is not enough to run up a public deficit. Government spending to stimulate the economy should always be an investment in the future. Running up liabilities on the public balance sheet must be offset by creating public assets. If this isn't done, the custodians of the public purse are storing up a heavy tax burden to weigh down any recovery later on. As concerning is the fact that the Labour government is using the stimulus to postpone reckoning with some pretty serious structural problems in the British economy - an over-reliance on cheap credit and on the financial services sector. This, rather than the mere fact of the fiscal stimulus, is what is bringing the pound down and concerning German fiscal hawks.