The Obama-Merkel Train Crash

Both visions of the measures needed to tackle the crisis have credible defendants and detractors.

Another global recession seems inevitable if the eurozone does not find a solution to its problems in the immediate future. At least that is what the hysteria of the markets, the warnings of Christine Lagarde (the head of the IMF), U.S. Treasury Secretary Tim Geithner and Barack Obama himself suggest. Certainly, if one analyzes stock market volatility, there emerges a marked correlation between the rumors of an imminent crisis in Greece (default and exit from the euro) and market lows and, conversely, a correlation between the prospect of a European rescue (eurobonds or extending the European Financial Stability Facility’s financial capacity) and periods of recovery, like the one witnessed earlier last week.

I have to say that this is the first time I have seen the announcement of an impending recession and European financial collapse in the Anglo-American press. And when these predictions are accompanied by desperate demands to the European authorities, one begins to suspect that something else is behind it all. Apparently, the debate between the two sides of the Atlantic is simple: America appears to be following Keynesian prescriptions (fiscal deficit and an ultra-expansive monetary policy), while Europe has swallowed the conservative myth, believing that the future is in austerity, as Felipe Gonzalez declared. In sum, the confrontation is between those who advocate for spending as a prerequisite for growth and those, led by Germany, who prefer fiscal discipline and “belt-tightening.” Both sides have distinguished economists aligned with it: Paul Krugman and Joseph Stiglitz defend the North American position, while Hans-Werner Sinn and his German associates are proponents of rigor.

Stated in these terms, it seems that the United States has a point: that growth must be reinvigorated before consolidating public finances to ensure that the deficit can be closed. But economic reality is a lot more complex. Besides, since economics is not a traditional science, behind both positions are hidden political and ideological preferences that obscure the debate. Without falling into excessive nihilism, some facts can be established.

First, the United States has, for over four years now, had a public deficit greater than 10 percent of its GDP and a monetary policy much more expansive than that of the European Central Bank. Interest rates have been close to nil since 2008, and Ben Bernanke has just promised to maintain them at this level until mid-2013. This is not a bad thing. If we are talking about an economy that is receiving fiscal stimulus equivalent to 10 percent of GDP (in the United States that equates to $1.5 trillion a year) with interest rates close to zero, and a central bank that is buying massive amounts of public debt (70 percent of North American Treasuries issued last year), what kind of growth should be expected? Should there be stagnation? Certainly not. Yet that is what is happening in the U.S., which worries Bernanke and Geithner.

The German position in the eurozone is quite different. Germany does not have a debt problem like the U.S. But it does face the possible collapse of certain southern European countries and the devastating effects this would have on its financial system and that other big European countries. To complicate matters further, in Germany, as with other AAA countries (Holland, Austria, Finland), popular opposition to extending aid to the south keeps growing. Another pertinent element is the German Federal Constitutional Court’s judgment on eurobonds (which it has prohibited) and the extension of the European Financial Stability Facility’s financial capacity (which it has stated requires prior approval from the Bundestag). Finally, the German Central Bank is strongly opposed to the European Central Bank buying any more debt from the south, which has resulted in the emergence of two camps in the ECB: Jens Weidmann, president of the Bundesbank, and his Dutch, Austrian and Finnish allies on the one hand, and everyone else on the other. Bearing in mind all these factors, any solution will be slow, difficult to digest and impossible to arbitrate in the short and medium term.

In sum, America is running out of ammunition to revive its economy. And in Europe, the old Europe of George W. Bush, the new Germany is not willing to assume the unbearable financial problems from the excesses of the south, especially in a country that is aging rapidly. The United States would like to see Germany come to the rescue rather than accept, as everyone must face up to at some point, that the time has come to pay its debts. Pressure from Obama? No doubt about it. But Angela Merkel has a point. In the medium term, when all of this has passed, and if the euro withstands it, we will have a deeply indebted United States doing what the Europeans are doing today. Meanwhile, the euro area, having followed the German diktat, will be solid and will dismiss the Anglo-American fallacy that the best growth is that paid for with debt.