Germany, U.S. head to G-8 summit with starkly different economic policies

There are 4,169 miles between Berlin and Washington. But on economic policy, the two capitals sometimes appear to be on different planets.

Germany has taken a tough-love, austerity-driven approach to solving Europe’s recession, pushing struggling countries to sharply cut public spending and chop their debt even as their economies slump. The United States confronted its own crisis with an $862 billion stimulus package in 2009, which brought debt levels to heights not seen since shortly after World War II but may have dulled the worst blow of its downturn.

Chancellor Angela Merkel, her advisers and even much of the German opposition see Europe’s problems in starkly different terms than the Obama administration does. Merkel’s impulse — to fight debt at all costs to boost investor confidence — has been at the core of Europe’s crisis response, because industrial powerhouse Germany has been calling the shots. But she has come under heavy criticism from Americans who say her efforts are misplaced.

The differing approaches have gained renewed urgency as the crisis flares again in the euro zone, and Europe’s response will probably dominate discussions Friday at the Group of Eight summit at Camp David. With a reelection fight looming, President Obama will want to avoid the economic hit that is likely to follow if the euro zone unravels. And there is new pressure on German-led austerity from furious voters in Greece and from French President Francois Hollande, who has pushed for more economic stimulus.

But the discussion inside Germany’s borders remains starkly different from that in Washington, or even just across the Rhine in Paris, where politicians and voters are more tolerant of budget deficits and are willing to throw money at short-term problems in the belief that doing so can jump-start struggling economies, making it easier to pay off debts later on.

“The German community is a closed shop,” said Sebastian Dullien, a senior fellow at the European Council on Foreign Relations in Berlin. “They’re speaking a different language.”

Germany’s belief that the crisis stemmed from excessive government debt inspired the austerity pact signed by 25 of the European Union’s 27 countries this year, in which governments pledged to enshrine strict automatic brakes on spending into their constitutions and reduce their debt to levels so strict that not even Germany currently meets them. Those rules have many Americans worried.

Europe risks “a negative spiral of growth-killing austerity” if countries cut spending and raise taxes every time their growth falls short of targets, Treasury Secretary Timothy F. Geithner said this week.

Germans, meanwhile, look at America’s debt-financed stimulus program with disbelief and shrug off any suggestion that a similar model could be used in countries such as Spain, where joblessness has topped 24 percent, or Greece, which is in recession for the fifth straight year.

“One cannot now seriously demand taking on even more debt to solve the crisis,” said German Finance Minister Wolfgang Schaeuble in an interview with the weekly Focus magazine this month. “That would be like vowing to improve oneself, but before doing so, sinning some more.”

Germans also ask where the money would come from. The United States was able to borrow from China, and the Federal Reserve has a wider mandate to maintain employment. Troubled European countries, by comparison, are having difficulty raising the money to pay the debts already on their books. And spending German money to give a boost to other struggling countries is deeply unpopular among taxpayers there.

Germans realize that others disagree with their hard line, including the Obama administration, the new French government and Italian Prime Minister Mario Monti, a technocrat who was appointed in November to steer the country through austerity.

The G-8 meeting “will certainly be an interesting discussion” as a result of these differences, a senior German government official said Wednesday, speaking to reporters in Berlin on the condition of anonymity in order to candidly discuss German government thinking ahead of the summit. But he added that everyone was in favor of economic growth.

An ingrained fear of debt

The German aversion to debt and faith in savings runs deep, and has held firm even though their economy is by many measures doing its best in decades. Rather than taking advantage of record-low borrowing costs to ramp up spending, German officials brag that they will instead get their budget close to balanced by 2014, two years earlier than their targets, and they have until recently resisted tax cuts. They say they have a special obligation to chop their deficits, because they are preaching similar medicine to European countries that are in trouble.

But the fear of debt isn’t just on the official level. Most German credit cards require payment in full at the end of the month, and many businesses take only cash. Households socked away 11.3 percent of their disposable income last year, according to estimates by the Organization for Economic Cooperation and Development, compared with 4.6 percent in the United States. Austerity even reaches the top: One of Merkel’s top economic advisers carries his papers in a simple student’s book bag instead of a briefcase. And the chancellor herself still lives in a modest apartment in Berlin’s city center.

Wages have been stagnant for the past decade, part of a deliberate strategy to make Germany more competitive. That wage restraint has helped fuel the export boom here, but it has also made ordinary workers vulnerable to inflation and kept domestic consumer spending anemic. Critics say that it fueled Europe’s economic crisis by starving Spanish and Italian exporters of potential customers and depriving Greece and Portugal of German tourist money.

“There had to be the spirit of wage moderation,” said Guntram Wolff, an economist at the Bruegel think tank in Brussels who once worked at Germany’s inflation-fighting central bank. “But they have gone too far.”

Hints of a shift

Critics of Germany’s crisis response say that the imbalances in trade levels between euro-zone countries are a better explanation for Europe’s problems than excessive government debt. Ireland and Spain, both suffering deeply from the crisis, actually started out with significantly lower government debt levels than Germany. By these critics’ reading, the austerity drive has actually damaged economic prospects by hurting businesses and drying up tax revenue. Investors, rather than growing more confident in struggling governments, have demanded higher interest rates on loans, exacerbating the problem.

Germany’s opposition Social Democrats have pushed for more growth. But they too are cautious about stimulus, and like to remind voters that it was under their leader, former chancellor Gerhard Schroeder, that Germany pushed through the tough structural reforms that they credit for its current prosperity. The country’s modest 2009 cash-for-clunkers program, at the height of the credit crunch after Lehman Brothers’ collapse, was dwarfed by the the scale of the U.S. response.

There are signs of an easing of Germany’s position. Schaeuble, the finance minister, said this month that he was comfortable with German wages rising faster than in other European countries and even with somewhat higher inflation, which would give relief to struggling southern European countries by making their exports more competitive.

But the move immediately set off panic in the German press. The country’s most widely circulated daily newspaper, the Bild tabloid, shouted “Inflation Alarm” in a three-inch-high headline last week.

“One of the issues is that the crisis isn’t felt very much in Germany,” said Clemens Fuest, an economist at the University of Oxford who advises the German government. “Of course there is a lot of theoretical debate, ‘Should we do more to help growth?’ But it is still relatively abstract.”

Michael Birnbaum is The Post’s Moscow bureau chief. He previously served as the Berlin correspondent and an education reporter.
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