Franz Kafka once wrote: “In the fight between you and the world, back the world.” Angela Merkel, however, has preferred caution, even though nations with similar recessions have unveiled huge stimulus packages. Her finance minister Peer Steinbruck recently warned of a “crisis after the crisis” led by inflation from excessive government debt.

Germany has offered some emergency stimulus measures, in total 1.5% of GDP in 2009 and another 2.0% in 2010, just meeting the IMF’s November recommendations: given how quickly the economy degenerated at least 2% or more was appropriate. Although Germany claims to spend more on social security, when all stimulus spending is considered together, stimulus spending in the USA as a percentage of GDP is more than 50% higher, and in the UK, twice as high. With interest rates too low for any monetary policy manoeuvre, Germany must increase its fiscal stimulus. Ironically such stimulus should be more effective in Germany than the UK, USA and Japan where huge plans have already been announced.

Germany’s economy depended on exports to fuel economic growth, with remarkably low private consumption growth whilst exports boomed. That boom was not based on chimerical gains in the financial industry; in fact the economy was holding up well, but the collapse in exports brought the economy to its knees, plummeting Germany into the steepest recession in the west.

Boosting demand at home with stimulus to make up for the drop in foreign orders could bolster the German economy. Such a move has been made possible by a long period of fiscal consolidation and wouldn’t result in the sorts of massive deficit figures emerging elsewhere. Since the capacity of the German economy appears to be relatively untamed, higher spending will surely help by picking up some of the spare capacity.

Moreover, a stimulus could relax the tendency for Germany to run an overweening current account surplus, which many economists, including Martin Wolf, hold partly responsible for the crisis; deficit countries funded their huge deficits by borrowing from those with corresponding surpluses. Though its surplus has now collapsed with the fall in global demand, a stimulus package that combined temporarily higher spending with permanent tax cuts could boost consumption even in the long term, stimulating the economy, insulating Germany against such threats in the future and reducing the systemic risk of the global economy in one bold move.

Despite concerns, inflation stands at 0.5% whereas unemployment is set to rise over 10%. Peter Bofinger, a leading academic advisor to the government stated that "Germany faces no risk of inflation for the foreseeable future. On the contrary, I see a clear danger of deflation." But policymakers have inflation-phobia stemming from Germany’s historical experience of hyperinflation, a bias that now clouds their judgment. If this is true then Merkel might be causing real, unnecessary harm to the German economy by holding back from stimulating and restructuring the German economy. Perhaps she should seek Kafka’s advice once more: “perhaps this very holding back is the one suffering you could avoid.”

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