Readers may have noticed that Team Obama has put on a pre-G-20 session push to have participants spend more to pull the global economy out of its nosedive. The New York Times gave a short summary:
In recent days, the White House has begun signaling that when leaders of the Group of 20 nations meet in London next month, the most pressing issue should be doing more to stimulate their economies through tax and spending policies — something that Mr. Obama can assert that he has already accomplished.
Europe, and in particular, Germany, has come under criticism for not having done enough. The EU continues to rebuff US pressure. From the Financial Times:
European ministers said on Monday they had no plans to add to recent fiscal stimulus packages despite calls from the US for radical expansions in government action to boost ailing economies.
Meeting in Brussels, finance ministers from the countries in the eurozone said they wanted first to see the effect of stimulus packages that had been passed. Peer Steinbrück, the German finance minister, said: “We are not debating any additional measures.”
He said that Germany had recently passed a second stimulus package worth €50bn ($63bn, £46bn) and was also counting on the automatic fiscal stabilisers that increase government spending in a downturn.
Jean-Claude Juncker, chair of the “eurogroup” of ministers, said: “The 16 finance ministers agreed that recent American appeals insisting Europeans make an added budgetary effort were not to our liking.”
Lawrence Summers, senior economic adviser to Barack Obama, US president, told the Financial Times recently that the Group of 20 countries should agree to boost government demand. On Monday Christina Romer, chair of the White House Council of Economic Advisers, said: “The more that countries throughout the world can move toward monetary and fiscal expansion, the better off we will all be.”
But European ministers are concerned that building up more government debt would threaten the stability of the eurozone and say that they want to assess the effects of spending boosts that have already been passed before considering more.
Now on the surface, this looks like the European being behind the eight-ball Hooverites, while the US is addressing the crisis. But it isn’t so simple.
First, most economists believe the US stimulus too small. So the US implying Europe needs to do more (if you are of the stimulus school) is the pot calling the kettle black.
Second, the point that Steinbruck made about automatic stabilizers is important, They are far more significant than most realize. Reader pigeon explained:
It is fact that Germany is export dependent. But it is also true that Germany applied by far the biggest domestic stimulus to cope with the recession. That is not visible in the official numbers of these so called stimulus packages because most of that stimulus is hidden in the German social security and employment security system. Most economists abroad fail to get that right and therefore complain about Germany being to slow in passing huge stimulus measures.
The German system has stimulus measures built in that have not to be passed by government once a recession is there.
There is a comfortable unemployment insurance and social security fund that Americans can only dream of. There is a thing called Kurzarbeit that enables companies to reduce on duty hours for their workforce in difficult times and receive a subsidy from the employment agency to make up for the reduced wages for their employees. Thus in contrast to most other countries they can keep their work force but at the same time cut cost.
It is very easy for economists to point out, that Germany will take a big hit. That isn’t news even to the government. So it is all the more important to remain objective about detailed policy reactions.
It is clear that the trade surplus model will not work in a recession. But take a look at the current numbers and you see that adjustment takes place automatically because domestic consumption has held up rather well even though exports plunge. In effect Germany is contributing much more to the global adjustment of the balance of payments than most economists are willing to admit.
And this from reader mft:
Regarding the generous German short-time work subsidy system, this really does act as a massive support, unrecognised by most Anglo commentators. But it comes at a cost to the firms, and big layoffs will start in the summer if this goes on. Despite this, attitudes in Germany (from my perch in the south) are remarkably confident – “Zuversicht” is the catch word here. I was at a party yesterday, and the boss of a local construction firm was beaming from one side of his face to the other, boasting of full order books. Manufacturing firms, it seems, are still investing in new buildings. And that’s here in the south where the auto industry and machine tool manufacturing (all export orientated) play a big role.
This admittedly contradicts what I heard in Austria at the beginning of December (note I met more Germans than Austrians in this little confab), The mood was very confident, but at the same time I was told order books six-nine months out showed a precipitous fall in activity. Maybe that has changed.
But regardless, this puts the US gambit in another light. Is this simply yet another example of US arrogance and ignorance, of the economic officialdom not understanding the operations of major economies? Or is this mere posturing, to try to put the focus off the US when most of the rest of the world holds us responsible for the financial meltdown?