Why Putin and Merkel Don't Put Growth First
The notion requires something of an-apples-and-oranges leap, but President Vladimir Putin of Russia and Chancellor Angela Merkel of Germany may have more in common than their experience in the former East Germany and the ability to speak each other's language. Both defy their critics by continuing to pursue policies that are bad for economic growth. From their perspective, however, it may make sense to resist placing growth above other considerations.
Conventional wisdom holds that if gross domestic product is growing, a government must be doing something right, or at least nothing too wrong. If GDP drops 0.2 percent, as it did in Germany in the second quarter of this year, and especially if it goes down for two consecutive quarters -- the formal definition of a recession -- the government is supposed to do something about it.
Merkel is under pressure to borrow and spend more to address the slowdown. For Putin, who is faced with a potential recession, the course would be comply with Western demands on Ukraine and earn the lifting of economic sanctions.
The GDP, however, is a deeply flawed reflection of a nation's welfare. Simon Kuznets, who laid the groundwork for the modern methods of GDP calculation, asked in a report to the U.S. Congress in 1934, "If the GDP is up, why is America down?" He continued: "Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what."
Both Merkel and Putin are trying to mind those distinctions.
In Germany, the low growth and threat of recession don't necessarily mean living standards will deteriorate. Economics Minister Sigmar Gabriel forecast that the number of working Germans would increase by 325,000 this year, and by half as many more in 2015. At the same time, he said, the number of unemployed would stay at 2.9 million, or about 4.9 percent. Net wages per employee will increase by 2.6 percent this year and by 2.7 percent next year. With such numbers in hand, German officials must be asking themselves what would be achieved if they gave in to the growing demands from both home and abroad to resort to deficit spending.
German officials must weigh two calculations. First, there's Merkel's longstanding promise to balance the budget and begin net borrowing by 2015. That is important politically because Germans are a financially prudent nation with one of the highest household saving rates, and because German culture puts an emphasis on responsibility and keeping promises. It is also a matter of strategy for Merkel, who has emerged as the de facto leader of the European Union and is attempting to lead by example. France is pushing to be allowed to disregardEuropean deficit rules and Italy is pressing for more latitude in spending. A German turnaround might send the wrong signal and could be seen as a betrayal by Austria and the Netherlands, which have sided with Germany on the need for deficit reduction.
On the other hand, there is the possibility that some debt-driven spending by Germany could revive GDP growth in the short term. Merkel has indicated that she sees that kind of growth as just meaningless statistics. In addition, she may find it difficult to understand why she earns praise for taking a principled stand on sanctions against Russia, which put a damper on growth, but is scolded for being similarly conscientious about fiscal responsibility, another brake on GDP numbers.
Putin's calculus is different. He has often bragged about Russia's 7 percent annual expansion between 2000 and 2008, but he knew that much of that was attributable to high raw materials prices. Natural resources revenue accounts for 18.7 percent of Russia's GDP, and the windfall from oil, gas and metals long enabled Russia to show spectacular growth.
The GDP numbers must seem ephemeral to Putin because they are so dependent on unpredictable external factors beyond his control. So instead of pursuing policies in response to the economy's performance, Putin is tightening his grip on power and stepping up propaganda efforts to weather the lean times ahead.
To a certain extent, the weakening of oil prices plays into his hands politically: A majority of Russians believes the West is waging a war on their country and many are willing to accept some hardship. Besides, even lower oil prices give Putin plenty of wealth to distribute to public sector and security service workers, who make up his support base.
There is no reason for Putin to fight for fractions of a percentage point in GDP growth by conceding any ground to the West. As with Merkel, it is a matter of cost and return.
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