Hoisted From Comments: Is Europe Doing More to Combat Downturn Than Perceived?

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?

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  1. CityUnslicker

    re the last para. probably both?

    I fully agree that we need to see what happens. For example, I remember reading textbooks saying that it took 18 months for the full effects of interest rate cuts/rises to be felt in the real economy.

    Why the rush now when we do not know what is working and is not working? We need to wait for data rather than looking at daily changes in the DOW and S&P or FTSE

  2. IF

    Well, what is a social system good for if not to tide over the bad times? Germany had to deal with a depression fairly recently (if only from the East) and Angela Merkel knows very well from her own experience what happens when industries collapse.

    1. Germans have a very graduated system of economic safety nets. These are still in place from the “bad” times five to 15 years ago. While the lowest of them is not comfortable at all, the brutal reality of tent cities like in the US is unimaginable.

    2. German consumers are by far not as overlevered as their US counterparts. They do have savings, and more importantly, not as many loans to service.

    Because of the previous two points there seems to be less of a sudden urge to increase savings. Contrary, people are happy to find bargains. I am not saying everything is rosy and I can only judge from what I read and discuss with family members in Germany, but there is less of an end of the world hysteria.

  3. Thomas

    Regarding German order books:

    It depends on where you look. The construction sector is doing quite fine. Germany never had a real estate boom, and it therefore doesn’t face a real estate bust. Industrial construction is down, but public infrastructure spending will offset the fall quite nicely.

    Producers of capital goods are facing a totally different situation:

    – Car production is down sharply. This directly affects a whole host of industries: Steel, aluminum, plastics, electronics.

    – New orders for heavy trucks have been inexistent for nearly 6 months now. Same is true for shipyards.

    – International orders for machinery makers are also down nearly 50 % yoy. Many companies still have full order books that will last until summer, but it’s highly unlikely that new orders will come flooding in by then.

    There is no doubt that the German economy is contracting sharply. And there is no doubt that the current account surplus is evaporating.

    Having said that, domestic consumption is holding up quite fine. Unemployment is still lower than it was a year ago. And that is due in small measure to the various automatic stabilisers of the German economic system, as well as German companies’ reluctance to lay off staff (in many cases they are anyway not allowed to do so due to multi-year agreements with the unions).

    As for Germany’s fiscal stimulus:

    Germany had a balanced budget in 2008. It will probably run a budget deficit of around 5 % of GDP this year. And that doesn’t include the various bail-outs, loan guarantees and export guarantees. If that isn’t expansionary fiscal policy, then I don’t know what is.

  4. MyLessThanPrimeBeef

    I think there are people out there who believe the best thing to do right now is to let the market work its magic, find its own equilibrium as water finds its own level.

    In Tao, it’s called wuwei, or non-action, which does not mean we should do nothing, but rather, we should do nothing that interferes with nature or her course.

    In our case, it’s best that we allow market forces to play out on their own accord. And if you have ever read books that talk about how men are from Mars and women from Venus, you would know that a woman will listen to your problem and sympathize with you, though she will not necessarily do anything about it, while a man, upon hearing a problem, feels compelled to do something about it even if he has no clue what to do. The books usually go on to chide men to learn how to just listen and refrain from doing something rash or destructive.

    With that introduction, I feel we elected the wrong candidate. We really need a woman to lead us in these times of economic peril, a real woman, not a woman who looks like a woman on the outside, but inside she is really a men, in fact, tougher than all men. And if that woman has a history of building bridges to nowhere, so much the better. As contrary as it might sound with regarding to wuwei, she still would be perfect to launch the badly needed infrastructure projects – lots of bridges to nowhere that will provide lots of jobs.

  5. M.G.

    I contend that if it was not for the financial crisis Europe, or most of its countries, would not be in this kind of recession. If some “stupid” bankers had not speculated or invested in US derivative products either covering their positions (cf. AIG’s insurance contracts to European banks), we would not be in this situation. Just a matter of misallocation of resources (like Bush’s war on terror). European banks leverage was the big mistake let’s say regulatory one?) but the origin of the problem was still in US. Europe was caught off guard by an external shock of financial nature. Yes in this respect the world holds US ( and his ex-President…) responsible for the financial meltdown and now global recession. There was no problem of mortgages as the system is different but money has simply stop flowing… and animal spirits got depressed and under stress tests…

  6. Thomas

    The US is calling for massive European stimuli because they believe it would reduce the American current account deficit, and thus automatically increase net demand in the US.

    However, this is anyway already taking place, with no need for any further stimuli to help it along:

    Germany’s export figures for January just came out. Apparently, the trade surplus is nearly 8 bn € lower than in January 2008.

    If we extrapolate this monthly drop to the full year, it would mean that the trade surplus goes down by a massive 3.5 % of GDP.

    Germany’s current account would still be a bit positive in such a case. But it’s far from clear if the situation doesn’t deteriorate further, as many German companies are still working down their order book. It’s not inconceivable that Germany’s current account will turn negative later in the year.

    If so, the Eurozone current account will be substantially negative, as it already was a bit in negative territory in 2008.

    Isn’t that enough European “net demand” for the rest of the world?

  7. Swedish Lex

    On a slightly different note, Bernanke’s speech today concerning a regulatory overhaul has EU written all over it. Much of Bernanke’s content seems to have been taken from the Larosière Report that came last week and other EU documents that are being prepared for the G20.

  8. Jonathan

    Why Austria is dark but not depressing:

    Sure, the right-wing parties are using the “crisis” to whip up support for their jingoistic anti-immigrant policies but then again, our President Heinz Fischer consistently still calls the European Union the “greatest peace process the world has ever known.” Despite the sad background noise, Austria is committed to Europe.

    The social compact among Austrians doesn’t place ownership front and center among the virtues of human existence. This was, after all, the first western European city to elect a Socialist government way back when in the 1920s. Around 70 percent of Viennese rent their homes (Me? I got a screaming deal at EU800/month for 150m2, with a 40m2 terrace and garden).

    Austrians save and they recognize a bargain. Consumption in Austria rose 0.4 percent in the fourth quarter, compensating for slowing exports. The local electronics retailers are still packed and a new Apple megastore’s doing well on Mariahilferstrasse.

    The government, for all its dysfunctional “grand coalition” talk, is boosting the electorate’s spending power with tax breaks (yippee! I gained EU2000 this year) and giveaways (that EU400/month bilingual kindergarten fee was just cut in half).

    Sure, the locals are grumpy and there’s always the embedded stereotype of what an Austrian “is” but of course we’ll soon be asking that same question about Americans.

    p.s. — my style conscious Austrian friends are always asking when the famous American shoe industry (that apparently made some really kickin’ styles) is going to return. I might add American-made Levis. Gee, guess that means Americans will have to get their monetary house in order so they can finally compete with Italians;-)

  9. Jonathan

    pss — the kurzarbeitzeit is also kicking in here for industrial workers (voestalpine, wienerberger, magna, etc…) whose work hours are being cut on falling orders. The government’s subsidizing wages to dissuade companies from firing workers with the expectation of an eventual turnaround. How long this is sustainable is an open question.

  10. Anonymous

    I’d add that from a demographical perspective it doesn’t sense for Germany and several other European countries to add too much deficit financed stimulus.
    The USA is a country with a replacement level birth rate and substantial immigration. Germany’s population is already falling despite positive net immigration.
    The amount of debt that is sustainable is very different in a country that will see a comparatively rapidly shrinking work force like Germany and one like the USA.
    The difference in median ages is not that large (yet), but asking Germany to go into debt right now to bail out younger countries is sort of like asking the parents of a profligate guy in his thirties to bail him out by spending their retirement savings.
    That guy in his thirties will have ample time to rebuild his life savings, but those closer to retirement have a much harder time.

    Yes, there’s a mutual dependence here because those retirements will be financed by the younger generations, but in the actual country situation: Do you think that say twenty years from now Americans will say “Sure, these guys in Germany helped us out back then with deficit financed and unsustainable consumption increases, we’ll help them out now?”
    Obviously not, it will be seen as their own problem to be solved.

    Similarly, is anyone proposing to give those current account deficit financed houses, big screen TVs, etc. back to the countries that financed them and are now suffering due to those customers not able to pay for them (right now)? No.
    In good times it’s everyone for themselves, in bad times there’s suddenly this “we’re all in this together” from some people.

    In summary, it might make sense for the world economy if some CA surplus countries start to spend, spend, spend. The question is whether that will be recognized by the CA deficit countries when this is over and the formerly surplus countries are having trouble? Somehow I doubt it.

  11. brushes9

    Sorry, but Europe has trillions in outstanding loans to failed states. You can rightly say nice things about Germany, but not about the soup that Germany is swimming in.

    Tip to Germany: the drowning penchant may need a solid blow to the brain, before you can safely effect a rescue, or he may pull you under, too: ‘after the strong language, the sledge hammer,’ is my motto.

    But, is Obama “doing more to combat the downturn than is perceived?” is the oozing sore in the blogosphere. If you are one who must actually govern and provide services, like the Governors of the 50 States, who seem to like him, then you might say, “absolutely.”

  12. charlie

    Yves made the point last week that our financial authorities are really treating this like a PR problem: the market has overreacted, once we have leadership things will stabilize in a few months, and our limited stimulus package (plus maybe one more) is all we need.

    They have a point: only car sales have cratered, house prices have deflated to the point of affordable, and the rest of the economy is not in the wasteland yet.

  13. Anonymous

    Charlie said:

    “…house prices have deflated to the point of affordable…”

    That may be your opinion. But US housing still has not corrected to the 2.5x-3.0x income multiplier that we saw in the last century. I’d argue that’s a better benchmark, especially since we will not see a real bottom in the US housing market until this is reached – or overreached, since an overcorrection seems likely.

  14. Warm, Dry and Well Fed

    A bit off-topic, but did anyone else note the Monday 3/9 NYT article on B2 entitled “Separation Rule is Not the Answer”?

    It claims that a return to Glass-Steagall is not called for because many of the big failures such as Bear Stearns, AIG and Lehman were not commercial banks. Volcker apparently disagrees and my superficial understanding of Glass-Steagall supports Volcker’s position.

    What do the experts here think of the Times piece and the issue?

  15. gordon

    Very interesting post on safety nets – thanks. There is also the issue of public employment. That’s certainly higher (as a proportion of the total workforce) in Scandinavia than in the US, but not so much in Germany and UK so far as I know at this stage.

  16. Anonymous

    @brushes9 said…

    “Sorry, but Europe has trillions in outstanding loans to failed states.”

    @brushes9, are you talking about trillions in Outstanding loans to the US?

  17. Anonymous

    Glass Steagall would have prevented Citi, BAC, Wachovia, etc.

    Of course we should bring back Glass Steagall. It’s so obvious.

  18. Anonymous

    In Europe the banks are in deep scheiss but the main-street economy is doing OK. I’m sure the citizenry there objects to bailing out their banks. That seems to be the commonality: everyone’s government is overpaying the banks.

    But the difference is, in the USA ordinary people are up to their eyeballs in debt with no way to pay it, and no security if they have their stuff taken away.

    We have to think of the banking economy and the real economy separately. Actually the former can get along without the latter, or at least with new banks replacing the old failed ones. Banks are businesses. When they fail, let them fail. That’s the lesson we all know but cannot seem to get out governments to execute.

    We all need to throw the bums out and replace them with new bums, who will work for us and not the banks. The next election may be too long to wait.

  19. Anonymous

    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?

    Yes (how can there not be arrogance with Summers floating about), and yes. And US politicians are worried about too much of the stimulus leaking, though most of what exits will do so via the left coast.

  20. Anonymous

    “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.”

    That is still better than not having your order book full now. :(

  21. PeeDee

    I had a long conversation a couple of weeks ago with a senior Japanese banker who basically said the same thing. I was stunned by the IP numbers; no precedent etc. He was much more sanguine about the drop, saying that corporates had recognised a budding inventory problem and in effect everyone downed tools. He was also not worried about the ripple effects. The job security in those heavy industry companies is high, personal savings are high; so the hit is taken at the corporate earnings level rather than by the worker/consumer.

  22. Anonymous


    This is the guy with the dumb idea about reducing hours of work last year.

    I know reducing hours of work is not a mainstream idea in the US, but spending another trillion we don’t have may not be so mainstream either – eventually.

  23. Guthman

    Much of the stimulus in the US merely counteracts local and state tax increases. In fact, here in NYC the city tax/fee increases are bigger than what I will receive extra from the Feds. The stimulus in
    Germany is pretty much net.

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