U.S. fights fire, Germans fear flood

By Paul Taylor
March 23, 2009

Paul Taylor Great Debate– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

The United States is fighting a fire in the world economy, but Germany and some other European countries fear a flood of inflation as a result.

That clash of cultures is at the heart of transatlantic debate over whether Europe should spend more and ease monetary policy to revive growth, with a deep economic contraction certain this year and an end to the recession not yet in sight.

The perception gap could cause lingering resentment among Americans and Germans on the way out of the crisis.

World Bank President Robert Zoellick sees concern on both sides of the Atlantic, not just in Europe, at the risk of inflation down the road from the massive additional liquidity created by the U.S. Federal Reserve and soaring public debt.

The current gush of liquidity made the glut after the bursting of the Internet bubble in 2001 look like a desert, he told the weekend Brussels Forum, a conference of North American and European policymakers, business and opinion leaders.

The dollar’s sharp fall and the jump in the price of gold after the Fed’s announcement of a giant purchase of long Treasury bonds reflected fears that the United States will try to inflate its way out of the crisis.

“What some political leaders say when you bring this up is: “Well gee, when we’re putting out the fire, can you really worry about the water damage?” In a way, you really do have to worry about both,” Zoellick said, advocating a timely pathway back to fiscal and monetary discipline.

The European Central Bank has provided unlimited liquidity for banks to unfreeze credit markets and is weighing following the Fed into unconventional measures such as buying bonds to provide an extra monetary stimulus. But Germans are especially wary due to their traumatic history of hyperinflation in the 1920s, something that contributed to the rise of Hitler.

“I can promise you the European response to this crisis will not be inflationary. That’s why guys like me exist,” German Bundesbank President Axel Weber, a member of the ECB’s Governing Council, told the Brussels Forum. “I can promise you once it starts looking inflationary we will tidy up the mess.”

European Union leaders agreed at a summit last week they had taken enough fiscal stimulus measures for now and rejected pressure from the Obama administration to do more.

German leaders were particularly dismissive of calls to throw more money at the crisis when two stimulus packages adopted in the last five months are still being implemented.

European Commission President Jose Manuel Barroso made clear EU countries would review their stimulus efforts if the economy continues to deteriorate. European Economic and Monetary Affairs Commissioner Joaquin Almunia said the high debt levels of many states before the crisis were a constraint on further deficit spending.

“We are concerned by countries whose public debt is increasing very, very fast,” Almunia told the forum. “We cannot afford to spend the next two decades absorbing the debt we have created to tackle this very deep recession.”

The dispute about how to fight the crisis may have longer term negative consequences on both sides of the Atlantic — fuelling pressure in the United States for trade protectionism and stoking opposition in Germany to helping European partners.

Germans feel they made tough choices in the good times to balance their budget and cut unit labor costs to improve their competitiveness. Now many feel they are being expected to pay for the fiscal recklessness of other European countries.

Americans are raging at the greed and irresponsibility of bankers and corporate moguls. But if Main Street resents bailing out Wall Street, it will be even more resistant to paying to revive European or emerging economies through imports.

Lord Mark Malloch-Brown, the British minister in charge of preparing next week’s London crisis summit of G20 nations, said there was a big risk if Americans felt other countries were not pulling their weight in reviving the global economy.

“The most dangerous idea out there is that the world is somehow going to expect the American consumer to ride to he rescue,” the former senior U.N. official said. “If that idea is left out there, it’s going to lead to protectionism in America.”

29 comments

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Germany is just trying to make a REASONABLE fiscal policy -runing on huge deficits was not normal before Hitler and Roosvelt. It has been proven that the New deal made the 30s crisis longer, not shorter. A new Ronald Reagan for president is what we are missing now. He had perfect insticts and common sense. In Russia and China, the US – it’s a joke. As seen from Europe, Mr. Obama is doing exactly what Russia, China and Iran want. It is frustrating.

Posted by Vojta Harok | Report as abusive

Let me just make the last comment. The actual crisis was caused by a bubble that comes from US governement efforts to push banks to give mortages (own living) to everybody (so nice goal!). Now, the policy is to create another buble = put gas into fire = print more dollars. This is agains a common sense – and EU central bankers are against. If Fed would have had the same policy as EU central bank, the crisis would never happen!

Posted by Vojta Harok | Report as abusive

so i want someone to answer the question, who is right and who is wrong, america who want to spend big money to get out of the crisis so fast, or europe who choose to take it easy and go step by step

Posted by mody | Report as abusive

The discussion on hyperinflation in the past is pathetic. The conditions prior german hyperinflation in the 30′s was characterised by massive / unsustainable reperation payments, the reorganisation of large parts of the popoulation and the impact of the global economy (which some economists say was way more integrated than now!). The german business system is much more stable as its anglo-saxon counterparts, and the versatility of Euro countries should positively affect inflation / deflation figures.

Both commentators and politicians who say spend money to get yourself out of the recession (and if you don’t have the money just print the staff anyway). History and theory shows this to be the least attractive option. How about instead focusing on the redistribution of capital via philantrophy as A. Smith proposed 250 years ago?

Posted by Daniel Tischer | Report as abusive

The US may well be trying to inflate its way out of trouble but a plunging Dollar is going to rattle countries like China with its huge Dollar holdings. At some point they’ll stop buying T-bills and head to other currencies. That point may well also signal the end of Dollar hegemony, which would be a disaster for Pax Americana.

Posted by Paul | Report as abusive

Hi Yanks,
I am German, and your understanding of the world and others is just shocking. Real solutions are only found when the core of the problems are understood and accepted; … and you are still in denial mode. No good sign for the future. You seem to have past your zenith. It is time to realize that and act accordingly.
Win back the trust and respect through humility and living within your means, or face protracted decline with the satisfaction of taking a good part of the world with you. At the moment, you are your worst enemy.

Posted by Hans | Report as abusive

Wow, everybody seems to miss the entire point: The banks are like bottles of water, who is willing to drink from them? The “poison” (debt) has to be removed first. No banks lending money, nothing will work. What happened to “short-term” loans for manufacturing companies, no loans to produce, no production. The companies that are no longer producing are told to hold their breaths, for how long? And when it all starts to work again, what ever happen to “just-on-time” as the warehouses are on the road are they not? Think about it? And as long as the warehouses are full with little demand, low prices. Warehouse stocks run low, rising prices. The banks (body)is not lending as they should, the body has no blood in its vein’s so to say. What happens to a body with no blood? Economics 101

Posted by Jerry Sumner | Report as abusive

Soory for my poor enghlish,
as european I am intersted about what is the world conjunture that hit us in the past two years and is still hitting us.
printing new money is a sovereign right of a state, controlling the flux of new bills in the finantial system states controle the inflaction and also can lead effectively the System in accordance with the ideological bias of a particular government.
What happened in USA, UK and Ireland, taking in account my relative lay vision, is that banks and the finance took the place of states creating money.
That money, of course, was fake money, because not supported by a state but by a financial concept.
now all the world has to pay in real money that Barbie coins…

Posted by oldmum | Report as abusive

Many of you fear inflation yet you acknowledge the credit markets are frozen! Fearing inflation when credit is tight is truly a mark of the insane right now. As long as credit is frozen (or at least not as fluid as it recently was) you should fear deflation. The German political establishment is misplacing its concerns right now and seems to fear its own shadow. Once credit has eased then they can worry about inflation. Demand-led growth through fiscal spending on short term projects (infrastructure and the like) can be stopped/slowed once economic/employment growth is restored. In this case America & Britain are proceeding in the correct manner while Germany ought to do the same. Germany shouldn’t act as if the is identical to the 1920s & 1930s. They have more tools and options today to control the situation than they had back then. The idea that America created this mess alone is also stunningly ignorant. For every borrower there must be a willing lender. The lender nations (Japan, China, Germany, etc) have all pursued mercantilist/protectionist trade policies that necessitate lending to America. Now those nations fear America will essentially devalue its currency to get out of that debt. What did those countries think as their trade surplus bubbles inflated? The answer is, just like the borrowers, they weren’t thinking. Now their productive infrastructure is scaled and leveraged for a market that is choking on their production. We in America are simply not spending as much and are saving more – just as many Europeans are preaching to us to do. The manufacturing capacity of China, Germany, Japan will have to painfully shrink/restructure downward to survive. What should Germany do to make this transition? Should Germany just sit it out and let their industry crumble? Or should they spend on restructuring?

Posted by John | Report as abusive