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U.S.-Europe Split On Economic Stimulus Erupts Ahead Of G20

Germany's Peer Steinbrueck and his fellow Europeans are "bewildered" by the U.S. approach.
At the start of this week, Larry Summers, the top economic adviser to U.S. President Barack Obama, asked Europe to consider another round of stimulus packages to spark battle the global recession.

But on March 10, EU finance ministers meeting in Brussels rebuffed the idea. Speaking for the group, German Finance Minister Peer Steinbrueck said there was "significant bewilderment" over their U.S. colleague's position.

But "bewilderment" may be a good word for describing how both sides of the Atlantic are coming to regard each other's approach to tackling the recession.

As the world looks to the G20 meeting of developing and industrialized states in London on April 2 for a coordinated strategy for reviving the global economy, in the run-up to the summit it's becoming clear that the United States and Europe have very different philosophies about how to get out of the current crisis.

The United States has budgeted an $800 billion package, which is equivalent to some 5.9 percent of the country's gross domestic product (GDP). That includes tax cuts to put more money in consumers' pockets, funding for public works programs, and more benefits for unemployed people.

By comparison, Germany has budgeted a 50 billion-euro stimulus package, equivalent to some 1.3 percent of its GDP. France has done the same. And Britain has budgeted a package that equals about 1 percent of its GDP. That is largely to bolster social-welfare programs that normally help people in times of need.

European Reticence

Why do Europeans appear so reluctant to "pump" huge amounts of money into their economies as the Americans are doing?

Peter Boone, a Europe expert at the London School of Economics, says the answer is in the different ways the two sides view the Great Depression of the 1930s and its causes.

"Germany in particular, and some of the core European countries are just extremely reticent to use fiscal and monetary policy to try to resolve this crisis and it seems to stem back to the hyperinflation in the Weimar period and there is just a general unwillingness to use public funds and printing money or creating new credit in order to solve economic problems," Boone says.

During the Weimar Republic, the German government's printing of money in the 1920s made the currency worthless. To go shopping, people had to carry bags, and later wheelbarrows, full of paper bills as prices rose daily.

Germany, as Europe's strongest economy, has the deciding voice in Europe's response to the current crisis. While some of its harder-hit eurozone partners might hope for EU-wide bailout packages, Germany -- which would have to supply the lion's share -- has not volunteered to fund anything more than its own national efforts.

Boone thinks that reflects the German belief that businesses that are in trouble may have to go bankrupt if economies are to emerge from this crisis healthy again.

"The Germans do believe, I think, in recessions being healthy for people and that if you have overspent what you have that you can go into default and bankruptcy and that is OK and that is how it should be rather than have the government print money and give you credit," Boone says.

...vs. American Intervention

By contrast, U.S. leaders think that kind of "survival of the fittest" approach could compound the economic downturn.

"In the U.S., I think [Federal Reserve Chairman Ben] Bernanke and people generally thought that the Depression was driven by allowing too much default and too many bankruptcies, etc., in the early 1930s," Boone says, "and had they had loose credit and filled those holes in the balance sheets by providing credit and printing money, that they could have prevented the defaults and pulled the country out of the Depression."

Washington has been noticeably more aggressive than European capitals in trying to lower the cost of credit for banks.

The Federal Reserve has lowered the interest rate it charges commercial banks to borrow money to 0.25 percent -- virtually nothing. The European Central Bank, currently is considering dropping its rate of 1.5 percent a little bit further -- to 1 percent -- but no further.

Yet the recession on the two sides of the Atlantic is about the same or, by some measures, worse now in Europe. Unemployment in the United States is 7.6 percent. The rate in France is 7.8 percent. In Germany it is 7.9 percent. In Spain it is around 14 percent.

The philosophies on the two sides of the Atlantic seem so far apart that many analysts say the United States and Europe will be able to agree on a rather limited menu when the G20 meets in London to confront the global crisis.

Robert Litan, a senior fellow at the Washington-based Brookings Institution, says they are likely to agree that governments need to better regulate the financial sector in the future.

"Everybody around the world, I think, agrees that we need more regulation specifically of the large financial institutions that pose what's called systemic risk," Litan says, adding that Fed chief Bernanke has "endorsed that approach. And so we're going to get tougher regulation, especially of large financial institutions, everywhere around the world."

Strong Signals

But Litan notes that that "does not necessarily spill over into agreeing on some kind of joint stimulus plan. They're two different subjects. The regulation is sort of 'How do we prevent this thing from happening ever again?' whereas the stimulus is 'How do we get out of it currently?' And on that issue there still seems [to be a] division of views."

Economist Boone says he expects the Western governments will agree to strongly signal that they will guarantee their key financial institutions that cannot be allowed to fail without bringing down the entire financial system.

And he says they may agree to help countries in Eastern Europe and the former Soviet Union and elsewhere that need additional bailouts to shore up their economies -- for example from the International Monetary Fund.

But there is little likelihood that the two sides will agree any time soon on following common strategies in their own countries as they continue to battle their own recessions.

That makes the current crisis a unique opportunity to watch two different interpretations of economics compete for success. And there is plenty of irony in the contest.

It's the United States -- known for its individualism -- that has chosen to incur huge state debt in favor of a collective soft landing.

And it is Europe -- known for its much higher degree of socialism -- that has opted to keep state debt low in favor of letting market forces trim its economy.

RFE/RL Washington correspondent Andrew F. Tully contributed to this report

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