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.
- 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.
- 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.).
- 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.