Industrial nations are at odds over how much stimulus the global economy needs, with the U.S. pressing for more and Germany rejecting calls for new packages
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."
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.