by Adam S. Posen, Peterson Institute for International Economics
Remarks given on the Economics Panel Conference on "What Should We Do for the Relationship with America?"
Social Democratic Party of Germany
January 19, 1998
© Peterson Institute for International Economics
The views expressed here are those of the author, and not those of the Social Democratic Party of Germany or of the Institute for International Economics.
In setting out a positive agenda for European-American, and particularly German-American, economic relations for the coming years, there are certain guidelines which both sides of the Atlantic should keep in mind. We all recognize that the task of maintaining unity is more difficult when not faced by a common military threat, and conflicts will arise. The key is to work towards agreement on the basic international economic framework, without demanding full convergence of our societies and economic systems. By so doing, we avoid unnecessary conflicts while establishing the trust and procedures required for resolution of the unavoidable ones. In this spirit, I would suggest three guidelines for economic policymaking on both sides of the Atlantic:
Let me clarify what I mean by each of these.
Learn Lessons, not Models
We have been hearing a lot of triumphalism lately about the "American model" for economies. In Germany, where there is so much concern over Standort Deutschland, that is Germany as a place in which to do business, calls for movements towards the perceived Anglo-American free-market system abound. Without wanting to put down my own country's accomplishments, I would like to say that this sort of thinking is exaggerated. Just because a country does well economically over one period of time does not mean that it will do well in all periods of time, or even that every aspect of its economy during that period of success is beneficial. It is more important for decision makers on both sides of the Atlantic to think in terms of specific lessons to be learnt rather than complete models to be followed.
Remember, it was less than ten years ago that Americans were flocking to Germany to study the German model. We were supposed to take up your extensive training system for skilled workers and your long-term oriented "patient" capital markets. We still need to learn from your training system, but thank goodness that we did not pick up on your financial system. In Germany today, calls for labor market flexibility should not be taken to require the entire American package of placing on workers the major part of the burden of adjustment to internationalization and to other structural shifts.
In fact, a key lesson to be taken from the United States for Germany and Europe is just how fundamental it is to get the capital markets right. In America, a vibrant financial system has produced strong growth and low inflation even in the face of a low savings rate, declining skills in the lower-third of the labor force, great uncertainty for individuals in the face of the health system and crime, and poor trade competitiveness. Recent events in Asia bring home the other side of the issue: even with strong fundamentals and growth trends, distortionary untransparent capital allocation mechanisms are sufficient to throw your economy off-track.
Once one thinks in terms of lessons rather than complete models, two things occur. First, recommendations from abroad become less threatening because they are partial rather than seemingly imperialist. Second, one realizes that the future competitiveness of Germany (and, to a lesser degree, Europe) may not be as bad as many fear. It is easier to fix capital market problems than labor market structures, although neither measure is painless or can be ignored. Some corporations, such as Daimler-Benz, have already begun moving the German financial system of their own accord. Do not be blinded to the real progress that can be made by thinking the only available choice is all-or-nothing acceptance of American-style capitalism.
Support the Rules, not the Players
It is shameful and frightening that much of the United States grows xenophobic and cowardly at a time of relative prosperity. I do not exaggerate to say that American political support for the entire postwar economic system is weakening - the putting aside of the fight for the proposed "Fast Track" trading authority is the tip of the iceberg. A far more important battle over the International Monetary Fund arising out of the Asian crisis is looming. Too often Americans and American politicians make conceptual mistakes in how they think about international issues. They see crises or conflicts in terms of specific countries' interests rather than as precedents and implementations of larger trends. They compare the direct costs of involvement to an imaginary baseline of no effect upon the U.S., rather than to the reality of potentially great costs of non-involvement.
This is why transatlantic coordination not only in response to emerging market crises but also in the management of our major international institutions (the WTO, the IMF, the World Bank, the G-7 summits, and the OECD) must emphasize the rules which such institutions enforce. It is in the long-run interest of both sides of the Atlantic that more and more countries around the world play by the rules of liberal capitalism - without such an emphasis, and the willingness to suffer setbacks and bear costs in specific instances within that system, there is no mechanism encouraging countries to behave along the lines we all wish to see them.
This implies a certain amount of burden sharing across the Atlantic. A study by my colleagues at the Institute for International Economics, Marcus Noland and LiGang Liu, forecasts a rise in the trade deficits both of the U.S. and of Western Europe on the order of $45 billion each due to the recent Asian crisis. It is vital that the EU share this burden of being the "importer of last resort" along with America in order to keep both America and the Asian tigers in the game.
Germany has an especially important role to play in implementing my guideline of supporting rules rather than players. No other country so well exemplifies how the long-term American interest is served by encouraging a country's policies and institutions to develop in line with the rules we set out. No other country, not even Japan, can claim to have simultaneously benefited from and supported the rules of the western economic framework to the extent Germany has. Thus, German pressure on America to fulfill its international obligations has a special force, one which I hope you will exercise. At a minimum, such short-sighted acts as the Bundesbank-led footdragging on German participation in the recent IMF programs for east Asia must be avoided.
Use Building Blocks, Don't Build Blocs
A common thread of my first two guidelines to transatlantic economic relations is pragmatism. In a similar spirit, it is important to view region-specific institutional efforts as means to an end and not as ends unto themselves. There is nothing inherently wrong or right, for example, with European unification as far as European-American economic relations are concerned. A unified Europe can make for easier coordination across the Atlantic or (as some French would propose) for tougher bargaining. A common European trade tie to various regions outside the EU can expand world trade and encourage liberalization abroad or it can divert trade and discourage competition. The choice is open, not determined by the institutional developments.
Both the proposed TAFTA and the coming euro should be evaluated with this in mind. Others on this panel may recite lists of the various areas of real trade conflict between the U.S. and Europe—bananas, "national security" technologies, Helms-Burton and Iranian sanctions, and so on—but the implication of such a list for a transatlantic free-trade area are unclear. In all of these cases, the respective trade restrictions reflect national foreign policy goals which TAFTA would not alter. Thus, trade conflicts cannot be used as an argument for or against building such a bloc. If, however, such a free trade area were created as a means to bring in new members to the system from eastern Europe and Latin America, or to keep the trade policy bicycle upright and moving while many politicians disdain the multilateral negotiation process with developing countries, then there would be good reason to go ahead.
Similarly, even if EMU may now be taken as inevitable, it should not be seen as setting Europe's destiny—especially with regards to transatlantic relations. Ultimately, the euro represents a decision by a number of nations within Europe to reduce their inflation rates. Having been in a DM-based fixed exchange rate system for several years, the participating countries (except for Germany) already gave up monetary sovereignty; having undertaken a disinflation and seen interest rates come down, the participating countries (except for Germany) will feel no major macroeconomic change. Germany itself will feel little effect on its economy because the European Central Bank will behave just like the Bundesbank, and, as my colleague Fred Bergsten has persuasively argued, the euro will be strong. So, for transatlantic relations, it is the use to which the euro will be put, not the euro's creation itself, that has an impact.
If the euro's creation is politicized into building a perceived power bloc vis-à-vis the United States, it would serve no European interests. On the monetary front, since the collapse of Bretton Woods there have been no exorbitant privileges accruing to the United States which have come at Europe's expense. In fact, if the euro were to be used aggressively against the U.S. for either trade-competitive or capital diverting purposes, it would undermine the euro's rise relative to the dollar as a reserve currency - free moving capital does not reward short-termism in policy, even with a politically strong institution motivating it. Moreover, in times of peace and stability, there are few advantages besides nationalistic pride to being "the" rather than "a" reserve currency, and certainly none sufficient to outweigh the costs of increased diplomatic strife across the Atlantic.
If the euro, instead, remains a building block towards a Europe of stable prices and predictable monetary policy, the creation of the euro presents a political opportunity instead of an inevitable conflict. As we begin to adjust the international monetary system in response to recent events in Asia, as well as to long-run trends, there is clearly some role for structured coordination of the major exchange rates at the core of that system. A Europe with a euro based on price stability would have far more to gain from diminished exchange rate volatility than from depreciation. Although the path of the dollar/euro exchange rate would still be largely determined by domestic macroeconomic cycles and policies, short-run responses to crises could be more easily managed between two rather than five transatlantic currencies—especially if their central banks shared a fundamental approach to monetary policy.
As the SPD slogan this election would have it, "Es geht um menschen," it is all about people. Transatlantic economic relations will best serve the people of America and of Europe by searching for agreement without fearing or forcing convergence of identities. We can learn lessons from each other without feeling oppressed by having to follow entire national models. We can support the rules of the international economic system which over the last fifty years brought both Germany and America great prosperity though it has and will require some short-run burdens. We can use the regional institutions which develop on each side of and across the Atlantic to build up our common well-being without feeling forced into political conflict by these institutions' existence. We can do something for the relationship between Germany and America as this conference suggests, but we have to choose to do so.