(emphasis mine) [my comment]

U.S.-Europe Split On Economic Stimulus Erupts Ahead Of G20
March 11, 2009
By Charles Recknagel


Germany's Peer Steinbrueck and his fellow Europeans are "bewildered" by the U.S. approach.

At the start of this week, Larry Summers, the top economic adviser to U.S. President Barack Obama, asked Europe to consider another round of stimulus packages to spark battle the global recession.

But on March 10, EU finance ministers meeting in Brussels rebuffed the idea. Speaking for the group, German Finance Minister Peer Steinbrueck said there was "significant bewilderment" over their U.S. colleague's position. [I am very happy to hear this. Common sense is not yet dead.]

But "bewilderment" may be a good word for describing how both sides of the Atlantic are coming to regard each other's approach to tackling the recession.

As the world looks to the G20 meeting of developing and industrialized states in London on April 2 for a coordinated strategy for reviving the global economy, in the run-up to the summit it's becoming clear that the United States and Europe have very different philosophies about how to get out of the current crisis.

The United States has budgeted an $800 billion package, which is equivalent to some 5.9 percent of the country's gross domestic product (GDP). That includes tax cuts to put more money in consumers' pockets, funding for public works programs, and more benefits for unemployed people.

By comparison, Germany has budgeted a 50 billion-euro stimulus package, equivalent to some 1.3 percent of its GDP. France has done the same. And Britain has budgeted a package that equals about 1 percent of its GDP. That is largely to bolster social-welfare programs that normally help people in times of need.

European Reticence

Why do Europeans appear so reluctant to "pump" huge amounts of money into their economies as the Americans are doing? [Common sense? A desire NOT to need a wheelbarrow full of money to buy a loaf of bread?]

Peter Boone, a Europe expert at the London School of Economics, says the answer is in the different ways the two sides view the Great Depression of the 1930s and its causes. [Has someone been reading my blog?]

"Germany in particular, and some of the core European countries are just extremely reticent to use fiscal and monetary policy to try to resolve this crisis and it seems to stem back to the hyperinflation in the Weimar period and there is just a general unwillingness to use public funds and printing money or creating new credit in order to solve economic problems," Boone says.

During the Weimar Republic, the German government's printing of money in the 1920s made the currency worthless. To go shopping, people had to carry bags, and later wheelbarrows, full of paper bills as prices rose daily.

Germany, as Europe's strongest economy, has the deciding voice in Europe's response to the current crisis. While some of its harder-hit eurozone partners might hope for EU-wide bailout packages, Germany -- which would have to supply the lion's share -- has not volunteered to fund anything more than its own national efforts.

Boone thinks that reflects the German belief that businesses that are in trouble may have to go bankrupt if economies are to emerge from this crisis healthy again. [Agreed]

"The Germans do believe, I think, in recessions being healthy for people and that if you have overspent what you have that you can go into default and bankruptcy and that is OK and that is how it should be rather than have the government print money and give you credit," Boone says.

...vs. American Intervention

By contrast, U.S. leaders think that kind of "survival of the fittest" approach could compound the economic downturn.

"In the U.S., I think [Federal Reserve Chairman Ben] Bernanke and people generally thought that the Depression was driven by allowing too much default and too many bankruptcies, etc., in the early 1930s," Boone says, "and had they had loose credit and filled those holes in the balance sheets by providing credit and printing money, that they could have prevented the defaults and pulled the country out of the Depression [by destroying the dollar's worth.]."

Washington has been noticeably more aggressive than European capitals in trying to lower the cost of credit for banks.

The Federal Reserve has lowered the interest rate it charges commercial banks to borrow money to 0.25 percent -- virtually nothing. The European Central Bank, currently is considering dropping its rate of 1.5 percent a little bit further -- to 1 percent -- but no further.

Yet the recession on the two sides of the Atlantic is about the same or, by some measures, worse now in Europe. Unemployment in the United States is 7.6 percent. The rate in France is 7.8 percent. In Germany it is 7.9 percent. In Spain it is around 14 percent. [Wrong. If US unemployment statistics were calculated the same way as German unemployment statistics, the US would have around 15% unemployment.]

The philosophies on the two sides of the Atlantic seem so far apart that many analysts say the United States and Europe will be able to agree on a rather limited menu when the G20 meets in London to confront the global crisis.

Robert Litan, a senior fellow at the Washington-based Brookings Institution, says they are likely to agree that governments need to better regulate the financial sector in the future.

"Everybody around the world, I think, agrees that we need more regulation specifically of the large financial institutions that pose what's called systemic risk," Litan says, adding that Fed chief Bernanke has "endorsed that approach. And so we're going to get tougher regulation, especially of large financial institutions, everywhere around the world."

Strong Signals

But Litan notes that that "does not necessarily spill over into agreeing on some kind of joint stimulus plan. They're two different subjects. The regulation is sort of 'How do we prevent this thing from happening ever again?' whereas the stimulus is 'How do we get out of it currently?' And on that issue there still seems [to be a] division of views."

Economist Boone says he expects the Western governments will agree to strongly signal that they will guarantee their key financial institutions that cannot be allowed to fail without bringing down the entire financial system.

And he says they may agree to help countries in Eastern Europe and the former Soviet Union and elsewhere that need additional bailouts to shore up their economies -- for example from the International Monetary Fund.

But there is little likelihood that the two sides will agree any time soon on following common strategies in their own countries as they continue to battle their own recessions.

That makes the current crisis a unique opportunity to watch two different interpretations of economics compete for success. And there is plenty of irony in the contest.

It's the United States -- known for its individualism -- that has chosen to incur huge state debt in favor of a collective soft landing.

And it is Europe -- known for its much higher degree of socialism -- that has opted to keep state debt low in favor of letting market forces trim its economy.

FOXNews.com reports that Europeans could balk at Geithner's call for more spending.

Europeans Could Balk at Geithner's Call for More Spending
FOXNews.com
Thursday, March 12, 2009


The U.S. mantra of spend, spend, spend is starting to wear thin on the other side of the pond.

European countries appear to be at odds with Treasury Secretary Timothy Geithner's fresh calls to unleash more stimulus money and free up a half-trillion dollars to lend to struggling countries.

It could lead to a tense discussion as Geithner heads to Britain to meet with finance officials from the Group of 20 nations Friday and Saturday. Those meetings come ahead of an April 2 summit of the G-20 in London.

As the U.S. calls for more spending, more Eastern European countries also are coming to the table hat in hand, looking for financial help from the International Monetary Fund and other groups -- but does the rest of the world have the money to give?

"We're just getting into the worst of the crisis in a global sense," said Ralph Bryant, a senior fellow at the Brookings Institution who specializes in international economic issues. "Many develo ping countries ... are just beginning to feel the really bad effects."

But European Union leaders recently rejected a request from Hungary for $241 billion in bailout money for the region.

"I think they're on a different page," Bryant said of U.S. and European financial officials. He said the calls by the U.S. for more stimulus money and international aid likely will stir controversy at the upcoming meetings.

Geithner on Wednesday called for a tenfold increase in the size of an emergency fund the IMF uses to help countries in trouble -- to as much as $500 billion. He also endorsed the IMF's call for countries to enact stimulus packages worth, on average, 2 percent of their GDP.

But in a report last week, the IMF said the U.S. was the only one of the world's seven rich industrial nations -- the Group of Seven -- on track to meet that goal. [In the race to destroy its currency, the US is winning.]

"I think that the United States has actually taken a significant lead on a number of these steps that are required," President Obama said Wednesday, calling for "concerted action around the global to jumpstart the economy" at the G-20 meeting.

Some European nations are reticent to take on the kind of national debt the United States has been accumulating in recent months. European critics have charged that the United States' demand for increased stimulus spending was an effort to divert a European call for a major overhaul of regulations governing the financial system to curb the types of excesses in the U.S. that spawned the crisis [Well, it is a diversion. Transparency is the last thing the US wants. It would destroy the US financial system by revealing the widespread insolvencies now being hidden by creative accounting.]. At a meeting this week of finance ministers of the 27-nation European Union, officials said they were doing enough already to support the world economy.

"Recent American appeals insisting that the Europeans make an additional budgetary effort to combat the effects of the crisis were not to our liking," Luxembourg Finance Minister Jean-Claude Juncker was quoted as saying after the meeting.

German Finance Minister Peer Steinbrueck recently said finance ministers from the EU's 27 nations were not pleased at U.S. suggestions that Europe has not done enough to stimulate the global economy.

Germany has been criticized for its reluctance to spend and stimulate its economy, Europe's largest. Their stimulus package was about 1.5 percent of its GDP this fiscal year, according to the IMF report. France's was about half that. (Meanwhile, countries like China and Saudi Arabia met or exceeded the United States' level of stimulus spending.)

However, European nations apparently are preparing to sign on to at least a partial version of the calls by the U.S. for more IMF funding.

The Times of London reported Thursday that the European Union was considering lending between $75 billion and $100 billion to the IMF to boost its lending ability. The Union also reportedly is calling for countries to help double IMF resources from $250 billion to $500 billion.

That $250 billion includes the $50 billion fund that the United States is talking about increasing. Calls to boost the fund have mounted as developing countries hit hard by the global downturn, particularly in Eastern Europe, have so far tapped about $50 billion from the IMF since November.

It's unclear whether European nations will go as far as Geithner is suggesting in helping the IMF, however. Bryant said a number of European countries favor raising some of the money from powerhouses like China, rather than shouldering so much of the cost.

My reaction: the United States and Europe have very different philosophies about how to get out of the current crisis.


1) At the start of this week, Larry Summers, the top economic adviser to U.S. President Barack Obama, asked Europe to consider another round of stimulus packages to spark battle the global recession.

2) On March 10, EU finance ministers meeting in Brussels rebuffed the idea. Speaking for the group, German Finance Minister Peer Steinbrueck said there was "significant bewilderment" over their U.S. colleague's position.

"Recent American appeals insisting that the Europeans make an additional budgetary effort to combat the effects of the crisis were not to our liking," Luxembourg Finance Minister Jean-Claude Juncker was quoted as saying after the meeting.

3) The US's and Europe's different philosophies step from their differing experiences during the Great Depression of the 1930s.

There is plenty of irony in the contest.

It's the United States -- known for its individualism -- that has chosen to incur huge state debt in favor of a collective soft landing.

And it is Europe -- known for its much higher degree of socialism -- that has opted to keep state debt low in favor of letting market forces trim its economy.

4) The United States has budgeted an $800 billion package, which is equivalent to some 5.9 percent of the country's gross domestic product (GDP).

5) Germany has budgeted a 50 billion-euro stimulus package, equivalent to some 1.3 percent of its GDP.

6) European Union leaders recently rejected a request from Hungary for $241 billion in bailout money for Eastern Europe.

7) European nations also are reticent to take on the kind of national debt the United States has been accumulating in recent months.

8) US calls for more stimulus money and international aid will likely stir controversy at the G20 meeting. For example, Geithner on Wednesday called for a tenfold increase in the size of the IMF's emergency fund to as much as $500 billion.

9) European nations are apparently only willing to sign on to half that.

10) The divide between the US and Europe means a rather limited menu is likely to emerge from the G20 meeting in London


Conclusion: The divide between the Germany and US remains as stark as ever. The words of German Finance Minister Peer Steinbrueck make me especially hopeful for the future of the euro.

For more, here are two of my past entries on Germany's rejectio n of US Keynesian economics:

Leery of Debt, Germany Shuns a Spending Spree

Germany's fight with Europe over future of the Euro