U.S. and Germany's squabble highlights G-20's tough tasks

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Friday, June 25, 2010

OF ALL THE hard issues facing the Group of 20 leaders in Toronto this weekend, none is more difficult than the trade-off between short-term growth and long-term fiscal stability. The Obama administration, still saddled with a 10 percent unemployment rate and facing a tough election in the fall, emphasizes the need for more government stimulus -- and wants its trading partners to join in. Germany's chancellor, Angela Merkel, trying to keep her government, and the euro itself, from collapsing under the weight of accumulated sovereign debt, has opted for tax increases and spending cuts. It would be an easy argument to settle if both the economic theory and the economic data behind it were undisputed. Unfortunately, matters are not so simple.

The U.S. view is eminently sensible -- from the U.S. perspective. Having served as the world's consumer of last resort for decades, the United States reasonably believes it could use a little help in that department, so that it can grow by exporting more while American households pay down the debt they ran up buying imported goods over the years. It would be easier to do that if Germany, and other surplus countries, were to bolster their own spending rather than seeking even greater competitiveness in world markets. Not coincidentally, a more consumption-oriented Germany could also provide a market for the debt-ridden Southern European countries, enabling them to grow out of their plight.

The spotlight is on Germany because China already has agreed to revalue its currency and because Brazil and other emerging market members of the G-20 are not yet large enough to power global recovery on their own. But whereas the Great Depression looms large in the minds of American policymakers, Germany's leaders are haunted by the hyperinflation of the Weimar Republic -- and the national catastrophes that ensued. Thus, while the Obama administration sees the deficit threat as secondary to the menace of joblessness, at least for now, Germany favors austerity as its best protection against a potential breakdown of the euro and the European Union. Having already been obliged to bail out Greece and to countenance radical monetary easing by the European Central Bank, Berlin sees itself as the last responsible actor in a continent flirting dangerously with economic heterodoxy.

U.S. officials point to Germany's relatively low ratio of debt to gross domestic product and argue that Germany still has plenty of fiscal space for stimulus -- unlike many other countries that are also turning to austerity now, such as Japan, Britain, Spain and Portugal. Germany points to its shrinking population and argues that taking on more public debt would merely frighten aging Germans into saving more. The implicit point, and it's well taken, is that the United States would be wise to face up to its long-term deficit, too -- and sooner rather than later.

In short, an argument over economic policy is also a clash of deep-rooted political interests and political values. Ideally, the United States and Germany would take more of each other's advice than they currently appear willing to do. At a minimum, they should attack structural distortions in their respective economies: chronically inefficient services in Germany, over-reliance on housing in the United States. Such measures might boost potential growth rates on both sides of the Atlantic, without the need for mutually exasperating demands. But if the squabbles on the eve of the G-20 demonstrate anything, it is that we do not live in an ideal world.


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