America Is from Mars, Europe Is from Venus

[Skybird]

http://www.spiegel.de/international/...613582,00.html

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For Obama, the answer is clear: The Europeans, especially the Germans, should do more to stimulate growth, preferably by spending billions on additional stimulus programs. Merkel, however, is strictly opposed to the idea. On Saturday, she rejected calls for new stimulus packages after meeting with British Prime Minister Gordon Brown in London. "Nothing has actually yet taken effect on the ground," she told reporters. "If we want to actually strengthen the effect of such packages we will simply have to implement them first, and not already talk about the next to come."

The German chancellor is trying to build support for her position throughout the European Union. At a joint press conference last week, French President Nicolas Sarkozy concurred with Merkel when he said: "The problem is not spending more money, but putting in place financial systems of regulation."

In addition to straining German-American relations, the conflict threatens to overshadow the London meeting of the 20 most important industrialized nations, the G-20, in early April. Until now, the item at the top of the planned agenda was a discussion of tighter supervision of international financial markets. But, as officials close to Merkel have noted, the United States is only moderately interested in this issue. Instead, Washington is pushing for a global initiative to stimulate demand with new government spending programs. "They are creating tremendous pressure," says one adviser to the chancellor.

For economists, the German-American conflict brings back unpleasant memories. During the world economic crisis of the 1930s, the European countries and the United States were also unable to agree on a common strategy. The result was a worldwide trade war, which accelerated the economic plunge into depression.

At their first summit meeting last November in Washington, the industrialized nations made it clear that this cannot be allowed to happen again. But now there is a growing rift between the United States and continental Europe.
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Given the current situation, it isn't exactly surprising that his advisors are citing an old piece of economic wisdom: The best economic stimulus program is the one your neighbor pays for. Treasury Secretary Timothy Geithner spoke last week of a "global crisis which requires a global response." In plain language, he was saying that the European countries, in particular, should pump more money -- a lot more money -- into the world economy. "Our economy needs a revival of global growth," Geithner said, by way of explanation of his appeal.
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The American government is currently operating according to the principle of "more is more." Money is irrelevant in Washington, where the stumbling economy is being bailed out with an unprecedented flood of government cash.


This approach is based on the idea that the economy functions largely in accordance with the relatively simple laws of hydraulics: If demand declines somewhere, be it in the form of investment, consumption or export, the government will intervene with its billions. Whether the funds can even be spent effectively any more stopped mattering a long while ago.


But not in Berlin. The German government officials listened patiently to their American counterparts' wishes, only to reject them politely but firmly. Germany, they argued, has already upped the ante with its own stimulus program, and many measures have not even reached the economy yet. For this reason, they insisted, it makes sense to wait to see how effective they will be. Besides, the Germans argued, the German efforts are totally comparable with the American efforts. They also reminded the Obama team that the crisis began in the United States, making it more than appropriate for the Americans to be playing a bigger role in resolving the crisis. In short, they suggested, no further action was to be expected from Germany.

This position stems from a concern about taking on even more debt. Germany is already heading for a new record national debt, and next year is not looking any better. Getting into debt is not nearly as popular among Germans as it is elsewhere, especially not in an election year. There are widespread fears in the population that the mountain of government debt can only be reduced by increasing inflation.

There are good reasons for this attitude. Based on the size and capacity of their respective economies, the two countries' rescue packages are not very far apart. Germany will have spent 3.5 percent of its economic output on its stimulus package by next year, the IMF calculated for last weekend's meeting of G-20 finance ministers. This includes 1.5 percent for this year and 2 percent for 2010.

DER SPIEGEL

Graphic: Stimulus packages in selected industrialized countries.



According to the experts, the American stimulus package is only slightly larger than the German one, when seen in terms of GDP. The Americans will spend 2 percent of their annual economic output on stimulus programs this year, and 1.8 percent next year. "We don't have to hide behind that," German government officials say with confidence.

The impressive difference in the deficit figures results primarily from the fact that the Americans have a sizeable deficit in public spending to deal with, even without their bailout packages. Germany's government budget, on the other hands, was almost balanced before the crisis.
In addition, Germany's version of the social welfare state lends additional stability to the economy, because it essentially adjusts government expenditures automatically to suit the economic situation. Thus, for example, unemployment benefits, which are significantly more generous in Germany than in the United States, help to shore up consumption in times of drastically rising unemployment, because the jobless still have a certain amount of money at their disposal. Economists refer to this as an "automatic stabilizer."

This is another reason Berlin is showing no inclination to give in to American pressure.
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At their monthly meeting in Brussels early last week, the European finance ministers agreed to rebuff the Americans for now. "We should concentrate on the efforts that have already been approved," said German Finance Minister Peer Steinbrück.

His counterparts, Steinbrück said, ought to think about how countries can best return to orderly finances and balanced budgets as quickly as possible once the crisis ends. This wish must have sounded like a provocation to the Americans.

Reactions in the United States were not surprising. The behavior is "very German," said economist Paul Krugman, last year's winner of the Nobel Prize in Economics. "Sometimes I think Germany has still not yet understood the enormous scale of the crisis."
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Chancellor Merkel, at any rate, is under the impression that the financial sector in London's City and on Wall Street in New York is gradually recovering from the shock, and that the American government is backing away from the agreed sharper regulation of the financial sector, based on the motto: The government should stimulate, not regulate.

But tighter regulations for banks and hedge funds are a matter close to Europeans' hearts, especially for the Germans. Although they managed to achieve stricter global control of major banks and hedge funds at the most recent meeting of finance ministers, the Germans fear that the British and the Americans will quickly return to a more liberal course as soon as the banking crisis winds down.

It were American recipes that brought the world into the mess. That America now returns to it's old attitude of demanding these ways to be mandatory for all and abandoned former agreements for more market surveillance and regulation of finacial transactions, shows an alienating mixture of arrotgance and having learned nothing from the mistakes of the immediate past.

For Europe however, it is a clear wakeup-call that the honeymoon it had with it's exaggerated and much hyped fictional image of Obama - is over.

I am in total rejection of the American position, and I am fully supporting the European demand for better monitoring of the financial markets. America is responsible, therefore it is justified that it shoulders the greatest load of the consequences. And America has to change. A return to the old system of ultraliberal markets not being sufficiently regulated - is non-negotiable. We live in the time of the penultimate evidence for this system not functioning, nor being self-supporting. Living on ever-increasing tick - canot be the solution, but will increase the size of the final desaster.

If washington does not fall into line, I hope the Germans have the courage to let the whole conference blow up. But considering Merkel, I doubt it. and as far as our new economy ministre, von Guttenberg, is concerned, he still has to prove himself. I am not sure so far what to think of him. He appears to be very reasonable and fact-ori9ented - but if he can be as tough as needed remains to be seen - the Anglosaxons will not give up their desastrous model without raising a fight, and the many voices of the Eu and the rifts inside the EU could play into the hands of Washington.

Which would be the next global economic desaster to come.