My reading of NY Times’ “Euro Crisis Pits Germany and U.S. in Tactical Fight”

The NY Times titles “Euro Crisis Pits Germany and U.S. in Tactical Fight”.

Even as European leaders put together their latest response to the euro crisis last week, a German-American clash over how best to manage a vast financial crisis and put the world economy back on a sound footing was set in stark relief.

According to the NYTimes’ article, there are basically two positions: The one that says that European countries should do anything to satisfy the markets and the one that condemns all quick action and gives priority to structural changes and profound questioning of the past choices.

– German Chancellor Angela Merkel would be the supporter of the latter:

Chancellor Angela Merkel of Germany defied skeptics and laid the groundwork for a deeper union that she said rights the mistakes of the euro’s birth and puts integration on a stable path for the long term. In the process, she forced German fiscal discipline on Europe as the prescription for combating the ills that afflict the region.”

– And President Obama would be the herald of the first one: “at the heart of the debate is the question of how far governments must bend or even bow to the power of markets. Mr. Obama sees retaining the stability of markets and the confidence of investors as a primary goal of government and a prerequisite for achieving any major changes in public policy.”

And the article to transcribe Almut Möller’ s words who is a European Union Expert at the German Council on Foreign Relations: “It’s a battle of ideas […]. There is a different understanding of how to set up a sustainable economy in a globalizing world. Here there is a major rift.”

To my opinion, it’s not just a difference of strategies but a difference of conceptions, how they consider their duties and how they define financial markets.

Whereas both of them see the market as a source of money to invest in the country, they don’t use it the same way.

It’s clear that the German way is based on the idea that there is no such thing as a market’s will. The market is just the addition of investors (different kinds of investors) just trying to figure out where to invest their money. Basically, there must be two criteria to make a country a safe place for investors.

1) The country has to create value. This may sound obvious but there is value and value. It’s a broad concept and we might need here to return a bit to our manuals of economy. The value is usually associated with the GDP. But there are at least two ways of calculating the GDP: the total of the expenses or the total of the created assets. In the German mind, the value comes naturally from the industry. People’s work aims to produce products and services that will be sold for a certain price and that will count for the revenue of a country. As long as workers keep producing stuff that brings in more than it costs, everything’s fine. The country gets richer and richer and everyone is happy… as long as the fiscal system is efficient enough to guarantee durability.

2) That’s the second element supporting the safeness of country. The fiscal system has to make sure that the state’s treasury will receive a part of the revenue in exchange of the spending for infrastructure. The government asks for money to the financial market, invest in the infrastructure so that the industry can flourish easily and then ask for a return to pay back the debt and hopefully make a profit. It is the government’s duty to manage this fiscal system between the too greedy pole where companies and people are suffocating under the weight of taxes and the too lax extreme keeping the state from the riches while the social subventions increase.

Therefore, the German conception would be that investors will invest in a country where industry is strong because it makes the country’s growth sustainable and where fiscal system is cautious and allows the government to pay its debts without increasing them beyond the no-recovery ceiling. And the government has to invest warily to help the industry without wasting money and use the fiscal policy as a leverage to make its investment work.

On the other hand, we have the American conception, more cicada than ant. Let’s try to summarize this conception in two elements:

1) The Anglo-American approach of the value has much more to do with the addition of the expenses than with the addition of the productions. It is generally admitted in these countries that the West can’t compete with the emerging countries in terms of production costs. The theory of the competitive advantages says that each country should focus on what they do best. The industry has been given up and only survived the stated funded big industries (cars, pharma, and so on), the state funded agriculture, the research and the services. No matter the production, because in these countries the value creation is supported by consumption and consumption is supported by credits and subventions. So the government’s duty is to make sure that its constituents can consume. To do so, the financial system has to be liquid and fluent. And that’s exactly where the financial markets intervene.

2) Financial markets are seen as a whole flow of money going where there is a profit opportunity. All those who work in the financial industry are paid to find a profit… every day. Financial markets are like a big hungry lion looking for investments, credits, in short looking for being placed. Of course, this lion wants a return on invest and as big as possible. Like every starving animal, financial markets think about eating now and just ask for some basic guarantees. In times of economic pressure, they want someone to smooth it up. And that’s the second duty of the State, provide guarantee for its people.

So Anglo-American leaders think that as long as there is consumption, there is growth and growth attracts markets’ money. The government has to reinforce the credibility of its solvency acting of the consumption level in any ways.

The result is that:

Many Germans also view the Anglo-American infatuation with the financial industry as the root of the West’s decline in competitiveness with the rising East. Big banks create and exploit bubbles, requiring huge bailouts, they say, without creating sustainable growth. Meanwhile, German exports will set a record this year, breaching the 1 trillion euro mark, or roughly $1.3 trillion, for the first time.”

Western “Economists have fretted for months that forcing austerity plans on Europe’s troubled economies — while a good long-term solution — could lead to deep recessions in the short term, compromising any chance for effective change.

In anayways, the result is that Germany masters the decision making process in Europe. Well they write the check for the rest of Europe (with the support of France, Netherlands, Finland,…), and, above all, they can borrow money at better costs than all the neighbours. That’s the main point. When no one can really afford a massive rescue, Germany still benefits from credibility to borrow relatively cheap money.

On a political level, Mrs. Merkel could look back on last week’s meeting of leaders in Brussels and declare, “We have succeeded.” Where her mentor, former Chancellor Helmut Kohl, failed, Mrs. Merkel managed to push through enforceable oversight of government spending that would allow the European Court of Justice to strike down national laws that violate fiscal discipline.

No one here is saying that Germany succeeded only thanks to its economic policy. European Union has profited to Germany and its neighbours’ frivolity contributed to the past good results. But as matter a fact, “Mrs. Merkel, the hard-line austerity queen of Europe, has won a hollow victory, one that will unravel like every other solution that was proclaimed as lasting but proved to be fleeting.

In opposition, the NY Times awards Mr. Obama of a victory against the markets: “Mr. Obama is fiercely proud of the record he achieved in keeping not just the United States but the entire world out of an acute financial meltdown after 2008, presiding over enormous stimulus spending in tandem with unrestrained support from the Federal Reserve. Now, the president and his allies say that in doing so, they may well have prevented the world from falling into another Great Depression.”

As we said, what the American way would recommend is to increase the consumption by stimulating the economy. Put it short, Mr. Obama recommends that European countries spend money instead of pressuring people. “Strong governments can borrow cheaply, mainstream economists on both sides of the Atlantic argue, and have an obligation to intervene more aggressively than they would in normal times to make up for the slump of private demand.”

Many observers, as well as many politicians, criticize German’s obsession with inflation. Journalists usually explain that it’s because of history and the traumatism of the 1920’s hyperinflation. “Germans are staunchly opposed to any solution that involves greater debt, but even more so to policies that might court inflation, their historic obsession.”

But the reasons might be found also in today’s situation. German people don’t consume a lot and they save as much as they can. Some theorists explained that trend by the protestant heritage. The consequence is that German constituents hold savings in their banks. Therefore, it’s comprehensible that the German Chancellor doesn’t want anything that would increase inflation and shrink the real value of German’s savings.

But the German Chancellor is not the only one taking care of national interests: “President Obama, of course, faces re-election and sees Europe as one of the biggest threats to his chances, as it could tip the American economy back into recession if austerity worsens the slump there. German officials are well aware of that and complain privately that electoral results are Mr. Obama’s chief concern.

The article describes Germany’s behaviour in a frightening way: “The Germans, for their part, seem almost to welcome the collapse of market confidence: without the rising pressure from markets, Silvio Berlusconi would not have resigned as prime minister of Italy. And most European partners would not have given the European Court of Justice the power to overturn laws inconsistent with fiscal discipline without the incentive of fear.

Implicitly, the article gives to the “financial markets” the power to overthrow governments without people’s consent. Isn’t it naïve? This is actually the result of the American conception of the financial market. From the German perspective, we may consider that Mr. Berlusconi’s administration was not able to deal with the crisis and then took its responsibilities. A change was needed and when it can’t come from inside then it has to come from outside. Moreover, should we be ready to do whatever it takes to calm down the financial markets? But at the same time, can’t we accept that sorting out this crisis requires a change of government? That’s another debate.

The main point here is that the one who pays the bill is usually to claim the right to impose his way.

However, who is going to pay the bill?: “Americans take a far more accommodating approach to the problem of moral hazard than Germans. The time for a reckoning is after financial stability has been restored, Americans say; otherwise, it is ordinary people, not the rich, who suffer most in a downturn”.

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