Big Tax Cuts, Bigger Spending Cuts

Why would a government of Social Democrats and Greens place its faith in the same economic program pursued by a conservative Republican administration in the US?

The German economy was in a rotten enough state when I outlined The Scope of the Crisis over half a year ago. It's gotten worse. Growth was low then; now, it's gone negative. The economy actually shrank 0.2 percent in the first quarter of this year while unemployment is still way up and over 10 percent.

Hardly surprising, then, that the government has decided drastic measures are necessary sooner rather than later. The surprise is that the governing coalition of Social Democrats and Greens is going for the same measures the conservative Republican administration in the US is banking on: tax cuts. Deep tax cuts, as the BBC calls them. They were on the drawing board at any rate, but when Chancellor Gerhard Schröder emerged from a weekend retreat in the Brandenburg countryside with his cabinet, he announced that the government would go ahead and do without 25 billion euros from its citizens a year earlier than originally planned, amounting to a cut of about 10 percent - the biggest in postwar German history, Schröder claims. And this is to be paid for by cutting spending by 45 billion euros by 2010.

Nowhere is the urgency of Germany's economic mess felt more acutely than in the capital. 15.6 percent of all Berliners live below the poverty line; in 1999, that figure was 13.5 percent. For a well laid-out map of Berlin's troubles, see Charles P. Wallace's report in last week's Time Europe, accompanied by an article from Ursula Sautter on the immediate consequences: Young, smart, skilled workers are leaving Berlin, which can only compound the city's problems. At a time when Germany's workforce is shifting to services and consolidating in cities, Munich, Cologne and Frankfurt are seeing the number of jobs increasing by anywhere between 8 and 10 percent in the last 4 years; in Berlin, the number has shrunk 2.5 percent.

Many of those lost jobs were paid for, directly or indirectly, by the federal government. Now, with promises of further cuts in spending and the city itself already 46 billion euros in debt, teachers and doctors will likely be working longer hours while many in other public services will be wondering if their jobs will be next on the block. One day, the Berlin papers list the swimming pools that'll be closing down; the next day, it's Berlin's culture minister wondering out loud whether or not the historic Staatsoper will survive the next round of cuts.

So Schröder's answer to jumpstarting a moribund economy is allowing financially strapped Germans to keep a few hundred euros in their pockets. Schröder's hoping they'll be burning holes in there. He claims these tax cuts will result directly and immediately in a boost in consumption. That's a questionable formulation even when Bush utters it, but at least Americans aren't too cautious when it comes to mounting personal debt. Germans are, though. It's difficult to imagine security-conscious Germans being told in the first moment that drastic times call for drastic measures, and then, in the next, that they need to go out and spend, spend, spend.

If they don't, then no money will be circulating in any sector of the German economy. The alternative would have been to pump real money into the economy rather than tighten the flow in the hopes that consumers would take up the slack.

Elsewhere

Business 2.0's Eric Hellweg on a different sort of tax, the EU VAT, which US companies will have to start paying on Tuesday.

OpenDemocracy continues its ongoing look at the future of Europe with Reinhard Hesse, who's more impressed than most with publication blitz of several prominent European intellectuals a few weeks ago calling for a new European identity (see Too Little, Too Late), and Mary Kaldor passes along the message Citizens' Europe sent to EU leaders when they met in Thessaloniki: "First, we wish to propose that the new constitution for Europe include in its preamble a commitment to Europe as a peace project." Four more principles in that spirit follow.

It was Gay Pride Weekend around the world, but the 25th anniversary of the Christopher Street Day Parade in Berlin. The BBC has the story and Spiegel Online has the pictures.

On the occasion of the current Max Beckmann exhibition at the Museum of Modern Art in New York, Michael Kimmelman reviews the artist's life and work in the NY Times.