by Adam S. Posen, Peterson Institute for International Economics
Column for the Eurointelligence Syndicate
July 10, 2009
© Eurointelligence Syndicate
This week's G-8 summit in earthquake-shattered L'Aquila, Italy, is likely to produce greater consensus but fewer concrete results than the two prior meetings. On a number of issues—climate change, Iran and Afghanistan, aid to Africa—the Obama administration has moved the US position closer to that of its G-8 partners and international norms.
That narrowing of the transatlantic gap is true on the financial-crisis issues as well. It could be hard to see this, sitting in Germany. Both German Chancellor Angela Merkel and Finance Minister Peer Steinbrück have pumped up their rhetoric for the home market ahead of the September elections. To listen to them, boom-bust cycles and Anglo-Saxon finance, lax regulation and securities-market vultures, American consumerism and rising deficits are all terrible things that must be dealt with to prevent another crisis. I have no doubt that these public figures believe much of what they are saying, which is kind of scary. There are even a few valid points of economic truth underlying what they say (particularly their call for greater regulation of financial institutions) amid the populist wishful thinking.
As opposed to the rhetoric, the actual policy difference between the United States and Germany, and thus within the G-8, as on economic matters, however, is pretty small. On financial regulations, both the US and German governments are committed to increasing capital and liquidity requirements for financial institutions, bringing as many nonbanks under supervision as possible, moving most derivatives on to open exchanges and through clearing houses, reducing the role and conflicts of interests of credit rating agencies, and tightening tax loopholes for financial transactions. The German (and French) proposals are one notch stricter than the US proposals, and that is the right direction to head. But both sides of the Atlantic, and the German and American governments in particular, are still not being tough enough on the fragile banks in their national systems and are still refusing to confront head-on the problem of "too big to fail" institutions. The Bank for International Settlements (BIS) is fully justified to have announced the insufficient measures taken by Western governments regarding the banking system and to call for greater action.
On fiscal stimulus, the rhetorical divide overstates the actual distance between Germany and the United States as well. By the time the March G-20 summit was over, Germany had joined China, Japan, the United Kingdom, and the United States in mounting significant fiscal stimulus to counter the crisis. All the back and forth about automatic stabilizers was beside the point; what matters is that everyone was moving in the same direction and how much government deficits rose in response to the downturn, and in both Germany and the United States they rose a lot. I think the criticism of the German Grand Coalition's lecturing other European governments about fiscal discipline is justified, but that has more to do with the future of Eastern Europe and the euro area, not so much the crisis response per se. Merkel's criticism of US fiscal laxity was directed at the wrong target. It is the Obama administration trying to expand health insurance coverage without fully paying for it that will be the real fiscal risk for the United States, not the temporary stimulus measures.
Trade is another area where the rhetorical gap is much wider than the actual practice and proposed changes. The Obama administration and US Congress have put in place domestic content restrictions on public works spending by state and local governments, which are protectionist. They have also given a lot of state subsidies to the troubled US-headquartered auto companies GM and Chrysler. The CDU-SPD coalition government, however, has also been giving out state-aid, particularly but not only to the auto sector. Germany has been better than some of its EU neighbors in terms of putting up outright protectionist barriers and certainly better than the United States on that score. Germany has also, however, been unwilling to consider being less export-oriented in its sources of economic growth. If Merkel and Steinbrück believe that global imbalances driven by US overconsumption led to the boom-bust crisis, then they must accept that Germany must be less of a net trade surplus country in years ahead to limit those imbalances. From the G-8 perspective, there will be no real conflict since mutual nonaggression will prevail, meaning Germany will not directly attack the United States for its trade barriers so long as the United States does not directly attack Germany for its export dependence. Japan worked out a similar implicit deal with the United States after the trade conflicts of the 1980s.
So the upcoming G-8 summit in Italy will not fail in terms of showing sharp divisions between the advanced democracies. If anything, in finance, fiscal policy, and trade, the reality of convergence will undercut the rhetoric that Merkel and Steinbrück are selling at home about their criticisms of US policies and financial capitalism. Unfortunately, this too easy agreement leaves the G-8 member governments far short of what they all need to do for all of our sakes, particularly in terms of creating sustainable recoveries in the banking sector and in global trade.
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