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Anxiously Waiting on a Trojan Horse

Guest post by Joe Joe Noory is an Architect, investor, and independent observer of news and opinion:

Somewhere between the emotional populism of wanting to burden the higher performing European states with guilt over resisting to bail out the Greek government, and the risk investors are being offered to take are the hard truths of bailing out of the broke Greek government by investing in their bonds: they might not just default on ?8,5 billion in obligations to bond purchasers due on 19 May, but run the risk of never being paid back for future bond offerings (of perhaps two years or less), much in the way depositors in an uninsured failed bank will never see a red pfennig of their invested savings on a default.

Ifo's Hand-Werner Sinn indicated that very same sentiment on Wednesday morning, according to this wire piece:

The warning came as a new poll showed nearly two-thirds of Germans were opposed to helping Greece, with a majority believing that membership of the EU brought more disadvantages than advantages. Asked on MDR radio if Berlin would ever get its money back, Sinn, who heads the Ifo institute and is one of the top economic advisers to the government, said: "To tell you the truth, no."
Greece "will not be in a position to carry out the necessary budgetary rigour" and will eventually have "to ask for Germany to waive the debt," he said.
He warned that bailing out Greece could set a precedent for other euro area countries labouring under high debt and public deficits. "It would be understandable if the Italians or the Spanish put pressure on us to pay up now because it is an important precedent for them," said Sinn.

Before you react, take the statement for what it is: a warning. It isn't a characterization of the ur-Greek citizen, or a nationalistic reflection, or a cultural issue, but a warning that the discipline to raise revenue and cut budgets in face of the street protests and strikes of civil servants and dependants on entitlements. It isn't a characterization of what they did, but a warning of future events, one which prices them and tells us what something is really worth, just as watching those who short an equity or commodity does.

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Anything You Can Do I Can Do Better

The health care debate in the United States has recently spurred a tangential conversation among pundits: Is America's or Europe's economy better? The controversy was initiated by Jim Manzi who recently wrote that Europe's bloated welfare state has destroyed its competitive advantage:
From 1980 through today, America's share of global output has been constant at about 21%. Europe's share, meanwhile, has been collapsing in the face of global competition - going from a little less than 40% of global production in the 1970s to about 25% today. Opting for social democracy instead of innovative capitalism, Europe has ceded this share to China (predominantly), India, and the rest of the developing world.
Paul Krugman has responded in kind, arguing:
The story you hear all the time - of a stagnant economy in which high taxes and generous social benefits have undermined incentives, stalling growth and innovation - bears little resemblance to the surprisingly positive facts. The real lesson from Europe is actually the opposite of what conservatives claim: Europe is an economic success, and that success shows that social democracy works.
Economists and journalists have been busy debating the question. Greg Mankiw cites GDP figures to question Europe's wealth, Mark Perry compares European countries to US states, Noah Millman asks why we are asking this question, and Clive Crook says the question is unanswerable.

The debate over the economic prowess of the US and Europe recurs at regular intervals. But it rarely leaves us with any new information. To some extent, the debate sounds like two teenage students trying to prove which one is at the top of the class. At the end of the day, the economies of European countries and the United States are closely intertwined, as the recent financial crisis has demonstrated. Unfortunately, the debate over the "right" economic system may cloud the bigger opportunity: how will Europe and the United States lead the global economy in coming decades?

What do you think? Who has the better economic model? Is that the right question to be asking?

"Merkel for the Fed"

The Wall Street Journal used to be very critical of Germany's economic and fiscal policies and big government, but now the paper is a big fan of the Merkel government. In March the conservative paper declared that Old Europe was right in rejecting Obama's calls for a huge global stimulus. And currently The Wall Street Journal (HT: John) is so thrilled by Chancellor Merkel ("Hallelujah, sister") that it wants to nominate her for chairperson of the Federal Reserve.

What happened? Chancellor Merkel rebuked the world's central bankers for being too politically accommodating:

"The independence of the European Central Bank must be preserved and the things that other central banks are now doing must be retracted," Mrs. Merkel told a meeting sponsored by Germany's association of metal- and electrical-industry employers. "We must return together to an independent central-bank policy and to a policy of reason, otherwise we will be in exactly the same situation in 10 years' time." Referring to the U.S. central bank specifically, she said "I view with a great deal of skepticism the extent of the Fed's powers." Usually when a politician lobbies a central bank, it's to demand easier money. We can't recall a similar tight-money intervention from a national leader, save perhaps Ronald Reagan's quiet support for Paul Volcker in the 1980s.

Conservative bloggers used to complain that Germany is so biased towards the Democrats. They said even a center-right party like Merkel's CDU would have more in common with the Democrats than with the Republicans. That still may be the case, but it seems that Germany's fiscal policy is now more in line with those from conservative Americans. And on a personal level, Merkel might got along better with Bush than with Obama.

Related posts:

Big Spending: What America Can Learn from Germany

National Temperaments Explain Reactions to Economic Crisis

Obama and Merkel are "Trans-Atlantic Frenemies"

"The White House views the chancellor as difficult and Germany is increasingly being left out of the loop," is the conclusion of a good Spiegel International article by Gregor Peter Schmitz and Gabor Steingart. According to them, the "Washington of Barack Obama" considers Merkel's policies "as hesitant. And when it comes to economic matters -- particularly after the experience in battling the financial crisis -- they don't feel she has much expertise."

The label "difficult" is attributable to Merkel's refusal to allow then-presidential candidate Obama to hold a speech at the Brandenburg Gate last summer. They also found it rude and impolitic when she didn't accept an invitation to meet with the newly elected president at the White House in April, despite that fact that both sides had been able to find time in their schedules for a meeting.

Reuters' chief correspondent Noah Barkin, however, puts the blame for the non-meeting on Obama.

The Spiegel article continues to quote two experts on Merkel: According to Dan Hamilton, director of the Trans-Atlantic Center at Johns Hopkins University, German "checkbook diplomacy" is currently experiencing a renaissance. And Stephen Szabo, head of the Transatlantic Academy in Washington, is cited: "France is in right now. The impression is that Germany isn't really of much use at the moment. (...) Paris is no replacement for Berlin in the long-term. (...) The Americans will need the Germans again in their dealings with Russia. After the German elections a new era will begin."

Economic Crisis: Springtime for Hitler?

Mel Brooks musical "The Producers" will be performed in Berlin in May, writes Der Spiegel (in English). It's not that much of a controversy. Just the usual "Should one be allowed to laugh about Hitler?" newspaper articles.

A bit more shocking is the comment by the heads of the Federation of German Trade Unions Michael Sommer, who suggested that Nazis might rise outside the cinemas as well. DW World:

In an interview with Germany's ARD television, Sommer warned of social unrest comparable to that in the 1930s - when widespread poverty paved the way for the Nazi regime's rise to power. The projected economic contraction of up to six percent is comparable with data from the years 1930, 1931 and 1932, Sommer said.

The article also mentions the violent workers protests in France...

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Boston Globe: Economic Crisis is an "Existential Threat" for the EU

The Boston Globe gets dramatic:

In America, the recession has been primarily an economic phenomenon, with conventional political effects. But in Europe, the economic tsunami is threatening to dissolve the continent's greatest political achievement: the peaceful democratic edifice of the European Union.

The fault lines have become evident in recent weeks. One division pits some nations of Central and Eastern Europe against older EU members of Western Europe. Another divides states leaning toward protectionist measures, such as France, against stout upholders of free trade, such as Britain and Germany.

Trans-Atlantic Disagreements Over Stimulus Grow

Financial Times:

Disagreements between the European Union and the US over how to combat the global recession widened on Tuesday as EU governments made clear they had little appetite for piling up more debt to fight the collapse in output and jobs. Finance ministers from the 27-nation bloc insisted in Brussels that it was doing enough to support world demand and did not need at present to adopt another fiscal stimulus plan, as Washington is urging.
The US-European differences are casting a shadow over next month’s summit in London of leaders from the G20 group of advanced and emerging economies, an event to be attended by Barack Obama on his first visit to Europe as US president.

Torch passed to Obama, 44th President; top 8 transatlantic relations issues for 2009

Obama took the oath of office yesterday to become the 44th President of the United States.  The swearing-in was followed by his inaugural address, historically an opportunity for incoming presidents to be visionary and inspirational.  Some of the most famous quotes in US political history are from inaugural addresses, such as JFK's "ask not what your country can do for you; ask what you can do for your country" (1961) and FDR's "the only thing we have to fear is fear itself" (1933).

So how did Obama do? Was it a new landmark in the US rhetorical hall-of-fame?  If you were looking to be inspired, this speech probably fell short.  He covered all the key issues and took a "it's busines time" tone, but it did not quite carry the poetic and inspiring overtures that an inaugural address could. Or perhaps like many Americans and citizens of the world I have come to expect miracles from Obama at every turn, and have thereby set myself up for disappointment.  The full text of the speech can be found here.

Obama did have powerful words for non-Americans around the globe:

As for our common defense, we reject as false the choice between our safety and our ideals.  Our Founding Fathers, faced with perils we can scarcely imagine, drafted a charter to assure the rule of law and the rights of man, a charter expanded by the blood of generations. 

Those ideals still light the world, and we will not give them up for expediences sake.  And so to all other peoples and governments who are watching today, from the grandest capitals to the small village where my father was born:  know that America is a friend of each nation and every man, woman, and child who seeks a future of peace and dignity, and that we are ready to lead once more.
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