Politics

05.15.12

Obama and Europe

What should Obama be doing about Europe, some ask? Nothing much. What can he do? If Greece returns to the drachma, that in and of itself probably isn't a big enough deal for the United States to feel any blowback. U.S. banks, according to this report, haven't been doing much business with Greece for a while. If the crisis spreads to Italy and Spain, then the euro could implode, and that obviously means many trillions of dollars of exposure by American banks to their European counterparts.

I see that Tim Geithner told a probably not very enthusiastic audience at the Pete Peterson Foundation today that he's glad Europe is moving toward growth:

"They have a stronger set of tools to manage the crisis now in place," Geithner told an event sponsored by the Peterson Foundation. "That allows them to shift the focus where they should to how they create the conditions for more growth."

"They" means the European nations that want to pursue growth over austerity. But it's not at all clear that this they can do a whole lot without Germany's assent.

What I've been wondering about more and more lately is, what is Germany's aversion to Keynes? Speaking on NPR over the weekend, the FT's Martin Wolf said: "To them, economics is a branch of moral philosophy, and [to them] it's immoral to promote growth by increasing fiscal deficits." He very strongly called this "nonsense."

Digressively but amusingly, Simon Wren-Lewis of Oxford University writes:

As long as I can remember, there has been an aversion to countercyclical fiscal policy within the German economic policy establishment. (Those already irritated by my personal anecdotes can skip the rest of this paragraph.) My first job when I worked in the UK Treasury was forecasting the European economies. It was just after the first oil price shock, and the UK and world were in recession. The Chancellor Dennis Healey wanted to use fiscal policy to stimulate the economy. The Treasury’s Chief Economic Advisor was invited to meet his counterparts in a short trip to Germany, and I was selected as a note taker. I remember this occasion not so much for the hospitality (which was excellent), but because I cut my long hair just before the trip, and therefore stopped looking like (acting like?) a hippy. I think I thought German officialdom might be slightly shocked if I did not. Anyway, I also remember that my senior colleague’s attempts to sell the UK view on fiscal stimulus – both in that context and as a general concept – met with a pretty unfavourable response.

He and others detail a long Germany history of aversion to stimulus. Some believe it goes back to the Weimar days, which I certainly don't doubt. In any case Angela Merkel is going to have to give a bit on the stimulus question as she meets with Francois Hollande, but what's likely to result is the kind of thing that usually results from such situations, a half from column A, half from column B muddle that leaves neither side happy and that is insufficient to getting the job done.

Obama is just going to be either lucky or unlucky on this one. I'd say he'd due a little economic luck, given that he did inherit a disaster from the incompetent who preceded him in office and then was thwarted when he tried to fix things by the people from the incompetent's political party who put politics ahead of country. If there's a second crisis in the United States, obviously that changes everything, and he'll have to be pretty much the best politician in the history of the country to win.