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  Fighting the Recession: America Is from Mars, Europe Is from Venus

Fighting the Recession America Is from Mars, Europe Is from Venus

By Christian Reiermann, Michael Sauga and Thomas Schulz

Part 2: More Is More

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.

Additional Stability

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.

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. "We were praised for the scope and speed of our programs," says Walther Otremba, a senior official in the German Finance Ministry. "We don't have to do anything more."

Other European countries cannot be quite as self-assured. The larger EU member states have been relatively reserved until now. According to the IMF experts' calculations, France, for example, only made 0.7 percent of its GDP available for economic stimulus programs in 2009. Italy, which has suffered from notoriously weak growth for years, has largely refrained from making any efforts to boost the economy.

The Messiah

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."

The American press already began asking whether what the New York Times called the "love-fest between Mr. Obama and the Europeans" was over. Other sources of conflict related to solving the crisis are foreseeable.

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.

This week the Germans will have a new opportunity to convince the government in Washington of the wisdom of their position. Economics Minister Karl-Theodor zu Guttenberg will travel to the American capital to meet with Treasury Secretary Geithner and chief economic adviser Summers. Conflicts are inevitable.

Weeks ago, Guttenberg, a member of the conservative Christian Social Union (CSU), made it clear that he does not necessarily share the widespread enthusiasm for Obama in Berlin. "I warn against seeing him as the messiah," he said.

Translated from the German by Christopher Sultan