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

As the global economic downturn worsens, the industrialized nations are at odds over how to fight the crisis. Obama wants the Europeans to introduce additional stimulus programs, but Merkel insists Germany is already doing enough.

The most important aspect of a political encounter is often the joint photo op. The parties shake hands and smile into the cameras, signaling to the public that they understand each other perfectly and everything is on track.

Seen from this perspective, the first meeting of US President Barack Obama and German Chancellor Angela Merkel last summer was a moderate catastrophe. Before withdrawing for a one-on-one conversation, the two politicians posed at the door of the chancellor's office.

Obama reached cautiously for Merkel's lower arm, while she apparently considered if she should pat him on the shoulder. Then the chancellor extended her hand to the then-senator, who, at that very moment, happened to be looking in the other direction. By the time he tried to extend his hand to her, she had already turned around. As one observer noted, there was clearly a certain "sense of trepidation" between the two.

What began as a somewhat rigid interpersonal encounter has now acquired a new dimension. A genuine quarrel could be brewing between the freshly inaugurated president and the German chancellor over what is currently the most important question in world politics: How should the international community combat the most serious economic downturn  in postwar history?

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."

Only Moderately Interested

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.

Meanwhile, the crisis is intensifying from month to month. For the first time since World War II, global economic output will shrink this year, the International Monetary Fund (IMF) predicts in its new World Economic Outlook (WEO) to be published in April. IMF representatives presented excerpts from the WEO at the meeting of G-20 finance ministers held in southern England this weekend.

Prior to the report, they had predicted minor growth of 0.5 percent for the world economy. But it is now clear that the economic situation on both sides of the Atlantic is only getting worse.

Economic experts report that exports, orders and industrial production are in free fall in Germany. The Kiel Institute for the World Economy (IfW) predicts that the German economy will shrink by 3.7 percent this year, while unemployment will increase drastically.

"We stare into a new abyss every day," says Gustav Adolf Horn, head of the Düsseldorf-based Macroeconomic Policy Institute (IMK). His institute also plans to adjust its prognosis for growth significantly downward to minus 4 percent.

No Recovery Before 2010

Experts disagree with the German government's prediction, in its annual economic report, of a trend reversal before the year is over. "A recovery should not be expected before the end of 2010, and even then it will not be strong," says Joachim Scheide, the IfW's chief economist.

The situation is no better in the United States, where the recession has driven unemployment in recent months to its highest level in 25 years. The outlook for this year is darkening from week to week, as major corporations announce one wave of layoffs after the next. Obama is coming under growing pressure to produce successes on the economic policy front.

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.

President Obama weighed in on the debate at the end of last week: "As aggressive as the actions we are taking have been so far, it's very important to make sure that other countries are moving in the same direction, because the global economy is all tied together."

Downward Spiral

In recent weeks, the White House has repeatedly issued signals that leave little doubt as to the new US administration's expectations, as well as its claim to leadership. In an interview last week that was apparently directed at Washington's European partners, Larry Summers, the president's chief economic adviser, made it clear that the new US administration will once again be doing the thinking for everyone else in the future: "The right macro-economic focus for the G-20 is on global demand and the world needs more global demand."

But this public admonition was not enough for Summers, a Harvard professor not exactly known for his tactfulness. Together with senior officials from the US Treasury Department, he pressed his counterparts in key European capitals to support the American approach. Their addressees in Berlin were Jörg Asmussen, a senior official in the German Finance Ministry, and Jens Weidmann, the chancellor's senior economic advisor. In their meetings with the two German officials, the Americans made it clear that they believed that the Europeans' actions to date had not been sufficient to stop the downward spiral of the world economy.

If demand collapses worldwide, they argued, governments will have to step into the breach. According to the Americans, Germany bears special responsibility in this regard.

Firstly, the German economy, with its large trade surplus, thrived on the strong consumption habits of other countries for years. Secondly, the Americans argue, Germany's government finances are in relatively good order, so Germany could afford to draw on substantial resources.

In fact, differences between Germany and the United States are glaring. The US budget deficit will exceed 10 percent of gross domestic product (GDP) this year, partly as a result of the government's massive, $787 billion (€615 billion) economic stimulus program. Germany anticipates a deficit this year of about 3 percent. The latitude for German efforts is obvious, Summers and his colleagues explained, suggesting that Germany ought to be in a position to do something.

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.

Germany's industrial output is way down.

Germany's industrial output is way down.


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
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