As the economic tsunami continues to rage across the planet, the near universal refrain has been that joint action is needed to pull us out of the crisis. But when it comes to stimulus spending, the U.S. and Europe have taken different paths, jeopardizing hopes of a united front to combat the downturn.
President Barack Obama this week urged the world's top economies to adopt aggressive, America-sized spending programs. "It's very important to make sure that other countries are moving in the same direction, because the global economy is all tied together," he said. (See pictures of Barack Obama's family tree.)
But on the other side of the Atlantic, European Union governments have spurned entreaties to let funds flow into their staggering economies. "Europe has done what it needed to do," says Luxembourg Prime Minister Jean-Claude Juncker, who is also chairman of the 16-member euro zone, adding that the U.S.'s appeals "were not to our liking."
The issue is expected to dominate next month's London summit of leaders from the G-20 group of top economies. "I do not have high expectations for London," says Nicolas Véron, a scholar at the Brussels-based economic think tank Bruegel. "Not everyone will follow the U.S. just because of Obama. Global solidarity solutions are fiendishly difficult both to decide and to enforce. There is a growing realization that regional or national responses are preferable wherever possible."
There is an irony to how the ostensibly free-market U.S. has just signed off on a $787 billion stimulus package equivalent to about 5.5% of total GDP (2.0% for 2009) while the supposedly interventionist E.U. has struggled to scratch together programs worth 0.9% of its total GDP. The E.U.'s reticence is partly due to fears that piling up debts and deficits to fight the collapse in output and jobs could destabilize the euro zone. It also reflects Europe's confidence that its economies are more resilient to the banking and housing collapses that have hit the U.S., while its stronger social safety net can soften the political impact of rising unemployment.
Yet even within the E.U., there are vastly different attitudes toward spending. Some member states are pumping huge sums into the economy: Spain's $115 billion public-works-led program is equivalent to 8.1% of GDP, while the Bank of England has just begun a $100 billion bank-note print run. Others, such as the Czech Republic and Estonia, are holding back because they don't believe in jump-starting their economies with stimulus packages or because, like Italy, their ragged budgets cannot stretch to offer more than 0.3% of GDP.
Germany has been especially reluctant to countenance any Europe-wide stimulus plan let alone global action despite unveiling two domestic spending packages totaling $97 billion. Berlin insists that every country's case is unique; its own preference is for guarantees and investments rather than outright bailouts, while being careful to dampen price surges (the country is still haunted by memories of hyperinflation in the 1920s). (See pictures of the dangers of printing money in Germany.)
And ministers are irritated by suggestions that the E.U. is dragging its feet, pointing out that most of the calculations on stimulus packages forget the so-called automatic stabilizers: Europe's generous welfare payments that kick in when unemployment rises. "The U.S. government should better familiarize itself with economic-stimulus measures in Europe that have already been started or are about to get started," German Finance Minister Peer Steinbrück said at a meeting of E.U. economic and finance ministers on March 9. German Chancellor Angela Merkel said in February that she wants the G-20 summit to focus on reforming financial markets and that she sees the stimulus debate as a distraction.
"It's unfair to blame Germany for holding everyone back," says Elmar Brok, a German member of the European Parliament with Merkel's conservative Christian Democratic Union. "We are already doing a lot at home, both federally and at state level. And we are doing it differently to the U.S., because we have made a lot of bank guarantees. But we also need to think about repaying our debts. Who will do it? The next generation?"
The G-20's finance ministers, along with central-bank governors, are meeting this weekend near London to prepare for next month's summit and smooth out their differences. The summit will mark Obama's first visit to Europe since becoming President, and he will take with him a huge aura of expectation. But if leaders cannot agree on a common approach to fighting the crisis, their meeting could be nothing more than a glorified photo opportunity.