Kruger’s Frau Nein

In Paul Krugman’s Op-Ed piece today in the NYTimes he teed-off on Germany, in particular framing Chancellor Merkel and her economic officials as the “biggest obstacles to a much-needed European rescue plan.” This in reference to Merkel’s meeting over the weekend in Berlin to discuss Germany’s contribution to the EU stimulus package.

Krugman’s criticism, which matches that of other European nations, relates to Germany’s inability to name their contribution in Euros that some project to be too low. Krugman took this sentiment to accuse Germany as the lone kink in the chain to setting this package in motion. In our view this is a bit shortsighted. Taking a step back, any time the European community comes together to make a group decision, consensus is never a guarantee; in fact, regional and economic differences play a huge role.

Just last week EU leaders agreed to spend €200 billion, or 1.5% of the bloc’s GDP, to bolster growth. Yet few governments have matched this target number with new spending or tax relief, prompting renewed discussion and a closer look at individual contribution on a per country basis. As an example of the disparity among EU nations on GDP basis, Germany’s Q3 GDP totaled €567 Billion versus Belgium at €83 Billion. Certainly Germany will pay a larger piece of the EU stimulus pie than Belgium, which may not directly benefit Germany in the long run.

Germany currently says its proposed package represents 1.3% of GDP. This comes at the heels of Merkel’s issuance of a €400 billion banking stimulus to guarantee loans. According to the WSJ, “a senior German official said Germany is waiting until US President-elect Barack Obama takes office and enacts his own stimulus program (to name theirs),” which if true, means the EU will have to be patient.

Germany, arguably the strongest economy in Europe and the biggest market for exports from the 27 nation EU, is sending a signal in dragging its heels—one that shows its cautious nature, but more importantly, implies that its economy may not need as much stimulus as the rest of Europe. The government looks to be buying time to run the cost/benefit numbers to determine what type of stimulus package will lead to growth both domestically and within the Union, as opposed to making a reactive decision.

In The New Reality, we want to own the patient and proactively prepared. We remains long Germany via the EWG etf. Today the EWG is outperforming most of the top 10 in this world’s country GDP tables. Slow and steady works for us.

Matthew Hedrick
Analyst