Will Spending Save Europe?

In a speech in Berlin on Jan. 23, International Monetary Fund Managing Director Christine Lagarde implored European leaders to boost stimulus spending and contribute to a bigger bailout fund or risk plunging the world into a “1930s moment.” The speech was Lagarde’s latest call for Europe to pull back on austerity and focus on growth. And while she was addressing all European policymakers, former IMF Chief Economist Simon Johnson says she clearly had an audience of one in mind. “She’s trying to get the Germans to do some fiscal stimulus in their own economy,” he says. “The Germans are the only ones with the fiscal space to do it.”

True enough. According to the IMF’s latest forecast, Germany’s fiscal deficit for 2012 is projected to narrow to just 0.7 percent of its gross domestic product, compared with 3.4 percent for the entire euro area. Yet with German Chancellor Angela Merkel focused on securing fiscal union among European Union member countries, it seems unlikely that she will heed Lagarde’s call to stimulate its economy. She’s ignored Lagarde before; just two years ago, while serving as French finance minister, Lagarde fruitlessly pleaded with the Germans to boost their domestic spending.