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Festive Germans still prudent

Mark Mardell | 06:00 UK time, Monday, 8 December 2008

Germany's Christmas market sparkles with seasonal cheer. Small girls in matching pink scarves and hats sing with gusto from the stage, as well-muffled adults drink mulled wine and choose between thick lentil soup, sausages in a bun or pizza before doing a spot of shopping for wooden toys or jewellery. You would hardly know there was a recession on.

Stall at German Christmas marketSome think the country's leader, Mrs Merkel, is behaving as though there wasn't. There will be a row at this week's summit because her government has been so dismissive of the European Commission's rescue plan. The commission wants all countries in the EU to cut taxes and increase targeted spending on key industries to boost the European economy. Mrs Merkel hits back with talk of not joining a senseless race to spend billions. Her finance minister, Peer Steinbrueck, talks of other nations behaving like lemmings, following each other on a path to suicide.

She is already being punished. Gordon Brown is hosting a "European global economic summit" with President Sarkozy and the Commission's President Barroso at Downing Street today. When we ask Mrs Merkel's office why she is not going, the indignant reply is "Ask Gordon Brown why she hasn't been invited".

But in a world where Gordon Brown has jilted Prudence, and George Bush has come out as a Keynesian New Dealer why is the German government not willing to spend its way out of a recession, when one would think it would take to it like a duck to water?

There are a number of possible answers, and they are probably all correct.

German Christmas market signAt the Christmas market I talk to Hubertus Pellenghar, the head of Germany's retail organisation. He says he would like the sort of tax cuts the commission are urging, but looks around him with approval at the shoppers spending and says that while consumer confidence has been low for a long while people are spending more this Christmas than last year. I am amazed, but he insists this year's figures are better.

Some think Mrs Merkel just doesn't realise how serious this is. They say that the recession has yet to bite in Germany, and that people are underestimating the seriousness of what will happen next year. There's a vague sense that as the whole thing was caused by failings that Germany does not share, the country will escape the worst of the knock-on effects, which does require an odd belief that economics is somehow fair and just.

There are those who point out that next year is election year. This makes governing in a grand coalition difficult. There is an intense debate within both the Social Democrats and Christian Democrats about the desirability of tax cuts.

Mrs Merkel would like to be in a different coalition after the election, with the Free Democrats. Their leader Guido Westerwelle tells me this is all about short-term politics. "It's really a problem that the rest of Europe is reacting and that the German government is still hesitating. The German government is concerned with the election campaign next year, but it would be better to act now by lowering taxes. Perhaps they are hesitating because they want to decide this very close to the election, but by then it could be too late."

Others think that tax cuts really wouldn't work in an economy where a large number of people pay no tax at all and those that do seem more inclined to save than spend. If they squirrelled away the money from a tax cut it wouldn't help at all.

This too is part of the social market. There is a distinct lack of a "get rich quick" mentality. Neither people not companies borrow a lot. Often firms deliberately aim at slow and steady growth. Thrift is a significant virtue. There has been no crash in house prices, because they never rose that much. The Germans are still in love with Prudence, even if Gordon has moved on. And they want to defend her virtue, angered that other countries are treating her shamelessly.

One of German's most prominent industrialists, the former head of the bosses' organisation Hans-Olaf Henkel, says: "One reason why our chancellor is a little bit more reluctant is the fact that we Germans believe we should never forget the stability of the euro. To spend a lot of money and accumulate a lot of debt will weaken the euro in the long term and leave additional debt for our children and grandchildren. Current governments should not forget the effect their decisions have on future generations. Just to spend and to leave it to our children to find out how to pay the money back I think is rather irresponsible. Therefore the German government response is not bad at all. Someone has to stay calm in Europe."

People at German Christmas marketAn American professor working at Berlin's Free University, Irwin Collier, thinks this is all rooted in the past and an extreme aversion to anything that might lead to the horror of the hyperinflation of the 1930s. He says it now expresses itself in Germany's self-perceived guardianship of the rules surrounding the euro, rules for a common currency without a common tax policy. "The one fear the Germans always have is that they will be stuck with the bill for irresponsible fiscal policies of their neighbours. This fear is in many ways well-founded.

"Germans feel like they've invested a lot in this set of rules on the size of national debt and they want to make sure that others are bound and they see that once people start violating those rules Germany will be paying. It's more looking to the future. It's not so much right now that Germany is afraid, they are really worried about establishing a precedent that other governments can run large deficits and Germany will be counted upon to bring stability back."

There might be a more immediate call for Germany to dig deeper into its pockets. The commission is calling for all EU countries to spend 1.2% of GDP on tax cuts and investment. Britain's initial programme falls just a tiny bit short of this, although subsequent announcements probably bring it up to the mark. France more than met the commission target and, without having done the sums, I suspect Spain is around this figure too. Germany isn't. Its programme amounts to 0.5%.

But it's clear that a whole range of countries, from Latvia to Ireland, Romania to Hungary, can't afford to spend the sort of money the commission wants. The commission's figure is just an average. So it needs somebody to spend more for the average to be reached. Now this is not about putting money into a common pot, it is about spending at home. But to reach the commission target of a Europe-wide figure of 1.2% someone has to spend more. The Germans don't want it to be them.

This could be a crucial moment in a trend that has been apparent since German reunification. A former economic adviser to the commission, Belgian economics professor Andre Sapir, says: "The message that Germany has to pay more because it has room for manoeuvre is not a very credible message".

But, I say, that is the way the EU has been run for the last 50 years. "Yes, but I don't think that is the way Europe is going to work for the next 50 years. It's true that Germany was the paymaster because of the past, the war, and the view that what is good for Europe would be good for Germany. I don't think that Germany should be made to pay forever for its sins. They were great, there's no doubt about that, I lost all four of my grandparents to the Germans, but Germany doesn't need to pay forever. Europe cannot be Europe if Germany is put in one corner and has to pay forever for the sins of the past."

As I make my slow way through the packed Christmas market I notice that far more people are taking their time standing at the small round tables grazing on the variety of food on offer, sipping hot fragrant wine held tight in mittened hands, than looking around the stalls, and buying Christmas presents. It's striking that, while it is very easy to see the commission plan as them getting in on the act, as little more than a political desire to be at the centre of things, all the economists I speak to think that if anything it is too modest, too little to do the job. Will sensible German prudence turn out to be the right course, or too stuck in a familiar rut in unfamiliar times?

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