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November 15, 2005
Germans Also Return To The Seventies

When competing coalitions join together in a parliamentary system to form an executive, they necessarily jettison parts of the two platforms in order to form a single policy plan that can get support from most of the members of all factions. Usually this means getting rid of the more innovative notions and sticking with less controversial ideas. Unfortunately, the new German government led by Angela Merkel wants to provide the exception that tests the rule. As the London Times reports, the Germans now will attempt to spend their way out of a deficit by taxing their way to economic growth -- a daring plan, given its remarkable failure every time it's been tried in the past:

Germany in the past three years has been the worlds most depressed economy, with the weakest growth in economic activity and consumption. The coalition partners representing, as they do, the opposite ends of the political spectrum found it hard to find common ground on most issues, but on one point they could emphatically and enthusiastically agree: the way to stimulate an economy suffering from mass unemployment and stagnant consumption is to increase tax. ...

Accordingly, the new German Government has decided to impose one of the biggest tax increases in postwar history and to target the extra taxes on the weakest and most sensitive parts of the economy: consumption, which will suffer a three percentage point increase in VAT, and housing, which will lose tax incentives for first-time buyers. In addition, to fend off accusations that the new consumption taxes will bear unfairly on poorer consumers, the Government will hit the rich as well, increasing the top rate of income tax from 42 per cent to 45 per cent.

It seems that Angela Merkels idea of a compromise between the Christian Democrats, whose most unpopular idea was the VAT increase, and the Social Democrats, who were berated for demanding higher income tax, was to combine the most unpopular measures from both parties manifestos, while dropping all the rest.

Welcome to the German version of the Smoot-Hawley Tariff Act of 1931. For those of you whose only idea of Smoot-Hawley is a comedy schtick by Ben Stein in Ferris Bueller's Day Off, it actually did exactly what Stein describes in the movie. It took a sad song and made it tragic by creating unnecessary barriers to imports, helping to deepen the global Great Depression. The protectionist instinct threw gasoline on the fire of a depression then, and the socialist instinct of the Germans will do much the same in Europe now.

When last seen, this strategy started an economic crisis across Asia that almost killed the Pacific Rim market. Japan, which had been seen as a juggernaut moving implacably towards global economic leadership surpassing even its American mentor, kneecapped itself by doing exactly what Merkel proposes in almost identical circumstances. Given France's state of affairs, the new German policy appears almost assured of sinking the EU in a similar fashion.

American economic planning had better not count on significant investment from European sources over the next few years. The only ones we're likely to see will be those who come across the Atlantic in balloons, hoping to escape the Brussels Wall of economic stupidity.

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Posted by Ed Morrissey at November 15, 2005 6:00 AM

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