U.S. fights fire, Germans fear flood
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.”