Balancing Global Macroeconomic Discrepancies

Jacob Kirkegaard speaks on a panel examining German and American economic policy, with Knut Bruenjes and Sherle Schwenninger, at a conference hosted jointly by the American Institute for Contemporary German Studies (AICGS) and the Brandenburgisches Institut Fuer Gesellschaft und Sicherheit (BIGS).

From AICGS:

On April 1, 2011, the American Institute for Contemporary German Studies (AICGS) and the Brandenburgisches Institut für Gesellschaft und Sicherheit (BIGS) convened a conference on “Balancing Global Macroeconomic Discrepancies: A Question of National Security?” The conference is part of a larger project, generously funded by the Transatlantik-Programm der Bundesregierung der Bundesrepublik Deutschland aus Mitteln des European Recovery Program (ERP) des Bundesministerium für Wirtschaft und Technologie (BMWi) and the AICGS Business & Economics Program, that examines American and German responses to the economic crisis.

The first panel examined German and American economic policy, answering questions such as the extent to which separate economic policy approaches in Berlin and Washington impact the German-American relationship. Does policymaking that reflects separate economic and cultural characteristics lead to effective decisions not only for either country, but also for the global economy? What role do a stable currency and price stability play in creating a cohesive society? How much can political decisions impact macroeconomic factors? Speakers Knut Brünjes (Bundesministerium für Wirtschaft und Technologie), Jacob Funk Kirkegaard (Peterson Institute for International Economics), and Sherle Schwenninger (New America Foundation) addressed these topics, as discussed below.

The economic crisis is impacted by the two great projects of globalization in the 1990s: the creation of the euro zone and the integration of the U.S. economy with Asian exporting economies. In the U.S., structural flaws allowed for long-term low interest rates, deregulation, and more liquidity. The crisis has shown that reforms are needed. One focus will be to improve the U.S.’ net export position – a move that will change the U.S.’ relationship with the rest of the world. Other small steps will be to rely less on personal consumption and to focus on income instead of debt. There are signs of recovery in the U.S. – the rate of growth from 2002 to 2007 is similar to now, although public debt has replaced private debt – but with monetary inflation and a tepid fiscal stimulus, the recovery of profits has not been supplemented with job creation. Thus, despite signs of recovery, there are concerns of a double-dip recession: consumption continues to drive the U.S. economy, real wages have declined, and the trade deficit remains. Going forward, the U.S. has a number of options: 1. A program of austerity, i.e., spending cuts without increased taxes (seen as untenable in six months); 2. Monetizing debt through the Federal Reserve; 3. Protectionism; 4. A second “post-partisan” moment, in which corporate taxes are cut, home buyers receive a tax credit, and more U.S. equities are made attractive and sold. This final option is the most likely to take hold in the U.S.

A large structural difference between the U.S. and the European Union exists: whereas the Congressional Budget Office (CBO) has a baseline deficit goal of 3 percent, the same percentage is the maximum allowed for euro zone members. The euro zone’s fiscal stance is similar to that of U.S. states; on the federal level in the U.S., the more likely political outcome is 6 percent. More tax breaks are the only likely bipartisan agreement, although this will not be enough, considering that $60 billion is only .4 percent of GDP. Thus, to solve a 2015 problem – maintaining the U.S.’ AAA rating – it will need revenues. The political impasse means that a crisis even larger than the 2008/2009 crisis will be the only likely impetus to act.

In Europe, the much-discussed banking sector reforms are an illusion, especially in Germany. The degree of political protection of banking in Europe surpasses protection of Wall Street in the U.S. A strategy of regulatory forbearance is now underway in Europe, as happened in the 1990s in the U.S. after the Latin American debt crisis, and restructuring of debt will be voluntary.

Despite the economic crisis, the U.S. has overtaken Germany as the second largest exporter (after China). The relatively stable positions of German companies have resulted in fewer exports. Still, as the third largest importer, Germany is not the cause for global imbalances. The differences between the U.S. and Europe are smaller than were portrayed during the crises, and are generally seen in the labor market: Germany has had fewer and more gradual job losses, maintained higher incomes, and restored domestic demand. German domestic investment, however, lags behind.