Europe Has To Be Fiscally Conservative Now

Numerous US politicians, pundits and bloggers complain that Europe (especially Germany) is once again free riding on the United States.

This time we are accused of refusing to carry our share of the global economic burden by failing to increase the stimulus to a gazillion euro. We are supposed to throw in the kitchen sink as the Fed did and follow yet another one of Washington’s “shock and awe” strategies since the one in Iraq was so successful.

Europe responds with yet another metaphor: Czech Prime Minister Topolanek, who currently heads the EU presidency, called President Barack Obama’s stimulus plan “a road to hell.” Yep, he attended an AC/DC concert the week before.

Apparently, it’s time to cool down and read James Surowiecki’s excellent article in the New Yorker. He argues that the United States needs economic growth more than Europe does due to the lack of universal health care and the much smaller social safety net.

I am tempted to call this post “Americans are from Venus, Europeans are from Mars” because the transatlantic buddies seem to have swapped their preferred positions. As Surowiecki explains:

In American politics, “Europe” is usually a code word for “big government.” So in the midst of a global recession, with the U.S. and China shelling out trillions in fiscal stimulus, you might expect that European governments would be spending furiously, too. Far from it. While the U.S. is devoting almost six per cent of its G.D.P. to fiscal stimulus, France and Germany are spending a barely noticeable twenty-six billion euros and fifty billion euros, respectively. Whereas the U.S. hopes that the upcoming G20 summit will lead to a global stimulus package, European policymakers have been warning against the dangers of “crass Keynesianism.” The U.S. Federal Reserve has been flooding our economy with money, but the European Central Bank has cut interest rates slowly and reluctantly. Far from wild-eyed leftists, Europeans are looking downright conservative.

Yep, Europe is now sooo conservative that even the Wall Street Journal agrees with us now: Old Europe Is Right on Stimulus. What a surprise!

What do you think? Do we have to swap the stereotypes of Europe and the United States? Is Europe once again piggybacking on the US? Or is Obama just making everything worse for the long run? German Chancellor Merkel told the New York Times: “On an international level, we must all recognize that after the crisis we need to return again to solid financial policies. (…) Otherwise, we run the risk of already preparing the next crisis.”

Whether you agree with the US or the German position, we have to recognize — and accept — the demographic differences and the different historical experiences, which shape economic policy so strongly. As Chancellor Merkel explained:

Over the next decade we will undergo a massive demographic change, and, therefore, borrowing is a greater burden for the future than in a country with a much more continuously growing population, as in the United States of America.

Besides the historical US trauma is different from the German one, as Surowiecki points out:

If the episode that haunts the U.S. is the Great Depression, in Europe, where the Germans have been dominant in shaping economic policy, the defining historical moment is the hyperinflation of Weimar Germany, when prices rose more than seventy-five billion per cent in just one year, 1923, and, in the words of Walter Benjamin, “trust, calm, and health” vanished.

I have first published a slightly shorter version on my own blog Atlantic Review: Why Europe is Fiscally Conservative