US, Germany on different wavelengths
by David Marsh
Mon 28 Jun 2010
If even more evidence was needed that German and American economic thinking operates on completely different wavelengths, the last fortnight has brought it.
President Barack Obama has piled on the pressure for Germany to do more to boost domestic growth to pull Europe out of the economic doldrums. Nobel prize-winner Paul Krugman has launched a diatribe on alleged German deflationary bias, declaring in an interview that raised hackles in Germany that Bundesbank president Axel Weber, were he to become the next president of the European Central Bank in November 2011, would be a "considerable risk for the euro area." Underlying differences in the German and American approaches have been a barely-concealed feature of the weekend G8/G20 summit in Toronto.
Given the mutual disdain between U.S. and German economic policy-makers, Krugman's somewhat nonsensical statement last week that Weber would be the right man "to aim at zero inflation and 13 per cent unemployment" must seal the Bundesbank man's candidature for the top job.
In the meantime, the German government has stoked up the public relations machine defending the latest Berlin economic measures, with both Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble using columns in the Wall Street Journal and Financial Times to plead that deficit-cutting is the right course.
So who's doing best in the debt vs. deflation stakes? So far the signs are that it is the German, not the American, strategy that is paying off. A spurt of mid-summer corrections of German growth estimates shows economic prospects in Germany have markedly brightened just at the time of maximum publicity about the US policy onslaught and the debt crisis in Greece and other southern European states.
Leading economic research institutes such as the Munich-based Ifo institute, RWI from Dusseldorf and the Cologne-based IfW centre and have all recently declared an upgrading in growth estimates for 2010 to around 2 per cent, with an uplift for 2011 prospects too -- significantly better than the German government signalled in its projection at the beginning of the year for a mere 1.4 per cent growth in 2010. Hans-Werner Sinn, the much-quoted head of the Ifo Institute, says the forces of growth in Europe have now shifted from the peripheral countries fighting massive debts to the "savings nations" of Germany and Switzerland.
The present economic constellation -- a weak euro, low interest rates, low inflation and a strong international recovery centred on the US and the emerging economies -- provides a highly supportive environment for the industrial heartlands of Europe. This means above all Germany.
This is a key reason why Europe's markets have recovered markedly since the €750bn international rescue package for hard-pressed eurozone members announced on 10 May.
In its June monthly report, the Bundesbank paints a robust picture of the German economy based on higher capacity utilisation, lower-than-expected interest rates and strong recovery in export markets. The central bank now foresees German economic growth at 1.9 per cent for 2010 and 1.4 per cent for 2011, respectively 0.3 and 0.2 percentage points better than its previous forecast in December 2009.
Focusing on the recently improved news, German daily Handelsblatt last week portrayed the lifting of prospects as a "summer fairytale" for the Germans and labelled Germany the winner of the European debt crisis.
Marking a sharp change from most of the past 40 years, when Germany has largely lagged the European growth rate, the Germans this year should record double the average euro area growth, according to the Ifo Institute. Only Slovakia is likely to do better in 2010. Since Slovakia, despite its football prowess against Italy in the World Cup, was not present at the Toronto meetings of G8/G20, that fact alone is likely to have put a spring in the step of Chancellor Merkel at the Canada weekend meeting.
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