The International Herald Tribune reports that Germany is at odds with US over crisis.

(emphasis mine) [my comment]

Germany at odds with U.S. over crisis
By Carter Dougherty and Judy Dempsey
Monday, March 9, 2009

FRANKFURT: Germany may be at the heart of any European response to a weakening world economy, but Germany's heart is not in it.

As world leaders gear up for a London summit meeting on April 2 where they are supposed to settle upon a coordinated response to the global economic crisis, conflict is brewing between Europeans who see tighter regulation of a skewed financial system as the main task ahead and Americans who are focused on the more immediate challenge of countering the acute dropoff in economic activity across the globe. [responsibility VS irresponsibility]

The differences between Europe and the United States are most evident in Germany, where years of growth fueled by a mighty manufacturing base and a deep-seated suspicion of financial capitalism has spurred a powerful resistance to the Keynesian-style deficit-spending favored in Washington. [Keynesian VS common sense]

As the United States pushes to ensure that governments around the world are spending enough to replace the demand that has evaporated as U.S. consumers lead a global retrenchment, Germany is sticking to the relatively modest stimulus it has already approved.

"The German approach is going to be 'let's wait on what we have already done,"' said Peter Bofinger, a professor of economics at the University of Würzburg and a critic of the government's reluctance to spend more.

This weekend, finance ministers and central bankers from the Group of 20 industrialized nations and big emerging markets will meet in London to smooth the way for the summit of prime ministers and presidents in early April.

On this side of the Atlantic, Chancellor Angela Merkel of Germany plans to huddle with President Nicolas Sarkozy of France on Thursday to formulate a European negotiating position. The next day, Merkel will retreat to the English countryside to meet with Prime Minister Gordon Brown of Britain.

But Merkel, who had been expected to follow Brown to Washington to meet with President Barack Obama in advance of the summit, has not yet announced any plans to do so.

With France and Germany also somewhat at odds over how to respond to the economic crisis, the British-German entente has emerged as a new twist in international economic policy.

When Germany tried to put hedge fund regulation on the agenda two years ago, Britain sided with the administration of George W. Bush in opposing the idea. But two weeks ago at a meeting in Berlin, Brown lined up alongside Merkel and Sarkozy in demanding close regulation of the financial sector.

"These reforms, which I have been calling for some time and before the global meltdown, are crucial," Merkel said. "It is about introducing transparency into the system." ["introducing transparency into the system" sounds like a very good idea.]

Merkel's government pushed through a 50 billion, or $63 billion, stimulus package in early January, but that still fell short of the demands from both outside the country and inside among a number of prominent economists to do more. [Those same "prominent economists" failed miserably to predict the current crisis and don't understand what is going on.]

Germany is not the only country in the world leery about cranking up spending. Japan is also watching its export machine falter, but a dysfunctional political system and already very high public debt levels limit the response there.

In Germany, the lack of palpable effects of the economic crisis for ordinary Germans, along with a deep-seated mistrust of running up debt appears to be reinforcing the government's opposition to doing more, analysts said. And Germany is only now beginning to debate whether its export-heavy economic model might need to change in favor of greater demand at home.

Political developments have also left Merkel with little room to maneuver. With elections due in September she is loath to go on a massive spending spree; the opposition Free Democrats, which she hopes to lure into a conservative coalition after the election, will accuse her of trying to buy votes.

Then there is the pressure from inside her own party, which is uneasy with bailouts and heavy spending. Some of the regional politicians broke silence over the past few days by criticizing Merkel's lack of clear leadership.

There is broad support for thrift in Germany because of its history. Savings were wiped out by policies that created hyperinflation in the 1920s and left it with another worthless currency after World War II. Since then, German economic policy, across party lines, has been about assuring stability - even if that means accepting slower growth or higher unemployment.

Merkel's main argument is that if Germany, the biggest economy in Europe, were pushed to spend more to stimulate the economy, it might drag down the Continent over the long term by miring it in heavy debts that would require even higher taxes [or destroying the euro's value]. That, German officials said, is something that the United States seldom appreciates. [too true]

At the same tim e, Germans warn, it would encourage more profligate countries - Greece, Italy and Spain are often mentioned in this context - to make the hard choices that brought the German budget nearly into balance before the crisis.

"We did our homework," said Kurt Lauk, chairman of the economic council in Merkel's center-right Christian Democrats party. "That creates a bad mood of sorts within Europe." [The reckless nations (Greece, Italy and Spain) want Germany to pay for their spending binge. They are upset that Germany is resisting the idea.]

On its face, Germany looks hard hit by the crisis, and the government expects the economy to contract by 2.25 percent in 2009, its worst showing in the post-war period.

Dig a little deeper, though, and the situation, to Germans anyway, looks less dire. German unemployment, reflecting fat orders to manufacturers and recent changes that made labor laws a bit more supple, has barely risen so far. In February it ticked up slightly to 7.9 percent.

Still, with energy costs off their peaks of the summer, and food prices - a source of much complaint in Germany - also down, the mood among German consumers has remained surprisingly upbeat. That stands in sharp contrast to their U.S. and British counterparts.

"The Germans have an economic crisis," said Wolfgang Twardawa, a consumer analyst at the research firm GfK, "but they don't have a financial crisis, and they certainly don't have a property crisis."

Twardawa said he believed the German government would end up passing another stimulus plan, but only after national elections in September.

The idea that Germans need to spend more is also sensitive in Germany because it casts doubt on the viability of the country's economic model. After German unification in 1990, manufacturers in the country rapidly lost competitiveness as labor costs spiraled out of control and their products lost once-sterling reputations. They responded in the late 1990s with aggressive cost-cutting that included stringent limitations on wage increase, and a new generation of world-class products.

The mixture made Germany the world's largest merchandise exporter - "export world champion," in the German press. But workers' wages stagnated and retailers in Germany suffered from weak demand.

"For the Germans to turn around and say there is no point in stimulating domestic consumption because our economy is export-oriented makes no sense from their own perspective or a broader international one," said Simon Tilford, chief economist at the Center for European Reform in London. "The crisis has graphically exposed the limits of the German economy model [Complete BS. The crisis has exposed THE LIMITS OF THE AMERICAN ECONOMIC MODEL, not the German one. Relative to America, Germany is doing amazingly well]."

My reaction: The German-lead EU continues to oppose US-favored fiscal expansion.

1) The EU and US have had different reactions to the financial crisis:

A) Europeans want tighter regulation of the global financial system
B) Americans are focused on falling economic growth

2) Germany rejects the Keynesian-style deficit-spending favored in Washington. (Last December, German finance minister Peer Steinbrück referred to the idea of European fiscal expansion as "crass Keynesianism".)

3) Germany's opposition to more deficit/stimulus spending stems from:

A) The lack of palpable effects of the economic crisis for ordinary Germans
B) A deep-seated mistrust of running up debt

4) With elections due in September, Germany's ruling party is loathed to begin an unpopular spending spree.

5) There is broad support for thrift in Germany because of its history.

6) "There is broad support for thrift in Germany because of its history. Savings were wiped out by policies that created hyperinflation in the 1920s and left it with another worthless currency after World War II. Since then, German economic policy, across party lines, has been about assuring stability - even if that means accepting slower growth or higher unemployment."

7) German unemployment has barely risen so far, due to fat orders to manufacturers and recent changes that made labor laws a bit more supple

8) With energy and food prices down, the mood among German consumers has remained surprisingly upbeat.


Conclusion: As I have written about before, today's outcome is shaped by history:

A) Germany is determined to avoid hyperinflation at any cost.
B) The US is determined to avoid deflation at any cost.