US and European paths to recovery diverge
Ahead of the G-20 economic summit, a divide grows over the balance of regulation and stimulus.
President Barack Obama, British Prime Minister Gordon Brown, and European leaders want the crucial April 2 London Group of 20 summit to end in a spirit of unity – a plan bold enough to check and reverse the global economic crisis.
Yet a week ahead of the G-20 meeting, a fundamental difference in US and European priorities is intensifying in the public arena. The divide over the balance of stimulus and regulation reflects differences in Euro-American cultures, institutions, leadership – and not least, in German Chancellor Angela Merkel’s concern about keeping voters happy ahead of September polls.
Whether the sides can hammer out an agreement – and how final decisions will be presented – is the trillion-dollar question.
A cacophony of top voices is rising. European Central Bank chief Jean-Claude Trichet opposes stimulus, as does the German finance minister, the British central bank chief, the European president, and others.
Those who support greater cash infusions as a solution to the crisis include the White House, Britain’s Mr. Brown, the heads of the IMF and World Bank, the Japanese prime minister, many nonofficial European economists, and Nobel Prize-winning columnist Paul Krugman.
French prime minister François Fillon, asked Monday what a G-20 success would look like, said, “A decision on hedge funds and rating agencies … and a clear direction on accountancy rules and … offshore tax havens.”
But the Americans may want a lot more than that.
The US (joined by Japan and China) continues to back both stimulus and regulation, in that order, to save the interlinked global economies and keep banks solvent and lending. As World Bank President Robert Zoellick put it simply in Brussels this week, “We need stimulus to replace the fall in demand.”
Europeans, led by Germany and France, want to cap stimulus and emphasize regulation to halt toxic assets, end tax havens, and avoid printing money that could bring inflation, a deep psychic bugaboo in Europe.
In the German-French view, sealed by Chancellor Merkel and French President Nicolas Sarkozy in a summit two weeks ago, public debt in the form of stimulus is premature. They say the eurozone is not in a monstrous crisis, and has adjustment mechanisms. Europe has coughed up more than €400 billion ($538 billion) in stimulus – including €50 billion ($67 billion) last week for the IMF, earmarked for a crisis in East and Central Europe.
“The priority of the EU is to get the G-20 to work on financial regulation. It is a clear rebuttal to [US Treasury Secretary Timothy] Geithner and [White House economic adviser Larry] Summers.”
Brown, who is hosting the summit in London, has found himself standing between Europe and the US. In the European Parliament this week, Brown made one of the most pro-European speeches of his career, advocating regulation. Yet he is now embarking on a whirlwind world tour as a staunch advocate of stimulus. On Tuesday, he spoke to the European Parliament in France, while he visited New York Wednesday ahead of a trip to Brazil and Chile.
While the potential clash is framed in Europe as US stimulus vs. European regulation, the White House this week called this a false dichotomy.
“We are living through a time of global economic challenges that cannot be met by half measures or the isolated efforts of any nation,” Mr. Obama, advocating stimulus, wrote in an opinion article republished in dozens of world newspapers March 24. “If we continue to let financial institutions around the world act recklessly and irresponsibly, we will remain trapped in a cycle of bubble and bust,” Obama added, in a nod to the importance of regulation.
Germany, the economic powerhouse, is the only EU country with imminent elections. Merkel’s party is falling in the polls.
She must reassure German taxpayers that the economy they worked hard to keep stable will not be tasked with bailing out the world, and fund those states less responsible in their behavior.
“For the time being, the official view is that the EU is not in danger, the euro is fine, the IMF will bail out the East, and there is no need for institutional solutions,” says a senior German political economist who requested anonymity because of political sensitivities. “We have elections, and we don’t want to bail out others.”
Yet recent IMF figures suggest the European economy, including Germany, is in tougher straits that previously thought.
“Believe it or not, Europe is harder hit than the US,” says Mr. Laurent of Sciences Po.
He argues that Europe’s regulatory approach to the G-20 reflects a culture of discipline in Europe, when what is needed is a culture of cooperation to face the crisis: “The ’08 figures, and ’09/’10 projections show the EU will endure greater shock. Unemployment may be greater than Europe’s famed ‘automatic stabilizers’ are prepared for. Our automatic correction mechanisms were not built for a crisis this deep.”
“I think the G-20 will end as a love fest, because that is what is needed,” he says. “But in Germany there’s a hope that the truth about the [economic] downturn won’t sink in before the election.”