Monday, September 21, 2009

International


06/23/2009
 

'They're Not Getting any Warmer'

Merkel Faces Difficult Talks in Washington

By SPIEGEL Staff

German Chancellor Angela Merkel is traveling to Washington this week to discuss the financial crisis and climate change with US President Barack Obama -- two issues where Germany and the US are deeply divided. In the new world order, Europe is looking increasingly irrelevant for the US.

When US President Barack Obama recently met with German Chancellor Angela Merkel in Dresden, he did something completely unexpected in the middle of their conversation: He deviated from the program.

When high-ranking politicians meet, the briefing book is one of the most important elements. It includes the agenda and the things a politician is expected to say. Chancellors and presidents like to stick to briefing book, because it gives them security.

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In Dresden, Obama remained true to the program at first. But then he unexpectedly asked "Angela" why, exactly, she didn't want Turkey to be accepted into the European Union.

Merkel was taken aback. She had to think on her feet and quickly come up with an answer for an issue on which she had no pre-prepared comments.

It became clear to her, once again, that this president is a challenge, both for Merkel and for German politics as a whole. She had even read a book by Obama to prepare for this meeting, but it didn't shield her against this president's surprises.

She could face the same experience this Friday, when she meets with Obama in Washington. Admittedly she will have a briefing book for the visit, but again there will be no guarantee that the conversation will not veer away from the prearranged topics.

The existing agenda itself is difficult enough. The two leaders will talk about the Middle East, Iran, North Korea and, most of all, about the two major crises of the day: the collapse of the financial markets and the possibility of a climatic catastrophe. The tone will be amiable, and yet it will become clear that the American and German positions are far apart when it comes to the question of how to handle these crises.

It is an unsettling situation. The prosperity and well-being of ordinary people are more threatened than they have been in a long time, and yet Germany and its most important partner seem unable to agree on a common course. It isn't even clear that the United States still perceives Germany and Europe as important partners. The emphasis is shifting toward China, and Merkel will find herself having to campaign on behalf of Germany -- something which makes it difficult for her to voice criticism of the US.

A clash of cultures is raging between Berlin and the United States on the issue of financial policy. The administration in Washington is combating the financial crisis by taking on more and more new debt. When former President George W. Bush came into office in his first term, there was still a budget surplus. According to conservative estimates, the United States will accumulate about $9 trillion (€6.5 trillion) in new debt just in the period from 2010 to 2020. The country's debt could soon amount to 100 percent of its gross domestic product. The dollar is already faltering, having lost 7 percent of its value against the euro in the last two months.

But the White House believes its policy of printing money is necessary, not risky. At a conference hosted by the Alfred Herrhausen Society -- a non-profit forum funded by Deutsche Bank -- in Washington last week, the discussion turned to high levels of government spending. Germany's Friedrich Merz, who is a Bundestag member for Merkel's center-right Christian Democratic Union and who specializes in financial issues, warned of exploding government deficits and the specter of inflation. David Lipton, one of Obama's senior economic advisers, responded by saying that this is not the time to worry about government deficits. Instead, Lipton said, this is the time for "sustained spending."

Merkel, on the other hand, is struggling to keep Germany's budget deficit at about 4 percent of GDP this year. In the United States, the deficit will likely have reached 13 percent when the current budget year ends this fall.

The German chancellor also considers the Americans' aggressive monetary policy to be dangerous. Like many economists, Merkel believes that although the current crisis was triggered by the bubble in the US mortgage market, the true causes lie in the lax interest-rate policies of the last 20 years.

Graphic: Inflation danger
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Graphic: Inflation danger

If money hadn't been so cheap for so long, there would never have been any buyers for the many high-risk securities that have now turned into toxic assets on the banks' balance sheets. However, central banks are combating the current crisis with precisely the same tools that caused the worst collapse in the global economy in more than 80 years: by injecting even more -- and cheaper -- money into the economy.

In a recent keynote speech at a meeting of the Initiative for a New Social Market Economy, a German organization that lobbies for economic reform, the chancellor criticized the lax monetary policy of the US Federal Reserve. "Together, we must return to an independent central bank policy and a policy of reason," said Merkel, in a comment directed at the United States, "or else we will be in exactly the same position 10 years from now." The Wall Street Journal praised the chancellor's speech with the words "Hallelujah, sister."

In contrast, it took Fed Chairman Ben Bernanke less than 24 hours after Merkel's speech to launch a crusade against the German chancellor. Noting that he "respectfully disagreed" with Merkel's remarks, Bernanke said: "The US and the global economies, including Germany, have faced an extraordinary combination of a financial crisis not seen since the Great Depression, plus a very serious downturn." Then he added, clearly with relish: "I am comfortable with the policy action the Federal Reserve has taken."

Archaic fears, combined with the memories of two different years, are at the root of the two countries' fundamentally different positions on the purpose and tools of monetary policy. The Americans remember the 1929 global economic crisis with horror. For them, there is nothing worse than a shrinking economy, which they see as the epitome of hunger, hardship and ruin. The Germans, on the other hand, think of 1923, when hyperinflation destroyed assets and plunged many into poverty.

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