Payback Time

Once upon a time there was a president named George. He liked to do things his own way, which annoyed some of his “friends” in Europe. But then a new president named Barack was elected, who not only promised to be nicer to his friends, but was actually very popular in most parts of the world. And the people of the world thought we would see a new era of international cooperation, at least between the U.S. and Europe.Not so much.

On this side of the Atlantic, the Obama administration and the Fed have been working night and day in an attempt to turn around the economy: Fed funds rate reduced to zero, $800 billion stimulus package, new plan to aid struggling homeowners, new plan for buying toxic assets, new budget, decision by the Fed to buy long-term Treasury bonds, new domestic regulatory framework outlined this week, etc. We’ve been plenty critical of various aspects of the U.S. response, but at least they’re trying.

(Continental) Europe, by contrast, has decided they’ve done enough and it’s time to sit back and watch.

First, in an interview for Monday’s Wall Street Journal (no-subscription-required summary here), Jean-Claude Trichet, head of the European Central Bank, said that no new measures are needed to combat the global economic crisis. Then Mirek Topolanek, the prime minister of the Czech Republic and the president (in this rotation) of the European Union called the U.S. emphasis on fiscal stimulus “the way to hell.” And all of this is coming in the week leading up to the next G20 summit. What happened to diplomacy?

While it is relatively easy to write off a prime minister whose government collapsed on Tuesday night, there is a very real divide between the United States and, in particular, Germany, the heavyweight in the European economy. And it’s very clear that the Germans (and the French) do not want to spend more money, increase their budget deficits, or do anything except talk about international financial regulation.

I think there are three possible reasons for this attitude.

  1. The Germans believe that the economy will recover on its own from this point. Given that not even the optimists in the Treasury Department believe this, I don’t see how this could be the case.
  2. They are so afraid of any risk of inflation that they would rather suffer through an extended recession and high unemployment. This could be possible, although misguided, especially since Germany is already in worse shape than the U.S., with its economy expected to shrink by 3.8% this year (vs. 2.5% for the U.S.).
  3. They realize that their economy is driven by exports, and therefore they are planning to free ride off of the U.S. stimulus package. In this scenario, Germany gets to contain its national debt and minimize the risk of inflation, while letting other countries turn the global economy around.

Now, we’re not blameless here, what with our “Buy American” provision in the fiscal stimulus. But at least our government isn’t closing its eyes and assuming the problem will go away.


Originally published at The Baseline Scenario and reproduced here with the author’s permission.

50 Responses to "Payback Time"

  1. Guest   March 27, 2009 at 8:47 am

    No offense Mr. Kwak, but so what? As for the implication that trying to spend money we don’t have to merely reinflate the bubble?I think I rather do nothing, close my eyes and hope it goes away. After all many believe the “stimulus” plan will only prolong the recession. Given our government can’t even carry out the digital TV conversion program correctly, how can we expect them to fix this with a Treasury leader who can’t even pay taxes?Yeah, I think I’ll close my eyes now.Incidentally, the Obamabit Kool Aid drinkers are getting what they voted for: another fool!

  2. Guest   March 29, 2009 at 7:59 am

    I don’t think the Germans are closing their eyes (unlike Zapatero here in Spain). The problem is that other players, especially China, need to be considered, I think what the Chinese do is more important than what we Europeans do. It’s not a question of “heavy-lifting” it’s a question of abandoning Bretton Woods II and possibly having a new supranational reserve currency. As to George Bush, it’s not about him annoying the rest of the world it’s the fact he was a egotistical scumbag who didn’t give a fuck about anyone else. The world is more likely to give Obama a chance but since the US is in large part responsible for the position it’s in, it needs to do some “heavy lifting”.

  3. The Stupid German   March 31, 2009 at 5:03 pm

    >>> “The Germans believe that the economy will recover on its own from this point. Given that not even the optimists in the Treasury Department believe this, I don’t see how this could be the case.”Well, not the US economy ofcourse, the German economy will. In fact, there is no crisis at all within Germany. Our exports suffer from the crisises in other countrys, but that’s not our crisis, is it? We are a small country, we can’t hardly bailout the rest of the world, who bought tenthausands of houses with virtual money, can we?