Germany’s Austerity Program Leads to Economic Growth?

The Wall Street Journal reports that while many scoffed at the move by Germany to rein in deficits and pursue a fiscal austerity program, that effort seems to be leading to robust economic growth:

What doesn’t kill you makes you stronger. In April, May and June, the euro zone was wracked by crisis and division. Peripheral government bond yields soared. The survival of the single currency was questioned. And yet the euro-zone economy has just turned in its best performance in four years, growing 1% on the quarter. The divisions in Europe haven’t gone away, but the core of the euro zone, led by a resurgent Germany, is providing an important anchor.

Germany’s growth of 2.2% in the second quarter is a record since the country’s reunification and was far above market expectations of 1.4%. At least some of that was a rebound after bad weather in the first quarter restrained activity, but even growth in January to March was revised much higher, to 0.5% from 0.2%. Crucially, it’s not just strength in exports: domestic demand is playing a role too. Headwinds from a cooling Chinese economy and flagging U.S. growth will take their toll, but are unlikely to take the shine off the year. With momentum continuing into the third quarter, Germany’s economy is likely to expand more than 3% this year, far above the 2% consensus expectation. Other northern European states also provided good news: France grew faster than expected, and importantly, business investment finally turned around after two years of continuous contraction.

Germany’s much-criticized policy response to the crisis looks vindicated; it is no surprise to see that it will push ahead with fiscal consolidation even if the budget deficit may now be lower than expected. Germany’s austerity efforts only kick in next year, and they are relatively modest. They could also serve to reassure conservative German consumers and boost domestic demand further.

The administration and Congressional leaders tell us that deficit spending is the only way to escape the protracted slowdown the US is suffering. We are warned that if measures are taken to curb the exploding debt, the economy is bound to suffer. This warning is at odds with experience: the United States enjoyed strong growth in the 1990s after measures were taken to curb deficit spending. And as we see now, it is also contradicted by the German experience – in which strong growth again followed a demonstration that the government was serious about limiting deficits.

Is this a clear indication that the US will enjoy strong growth if and when our own federal deficits are under control? Not necessarily, but it does put the lie to the claim that continuing deficits are the only way to address our problems.