Wolfgang Schäuble looked slightly tortured as Larry Summers, sitting next to him, laid out the nightmare scenarios facing Europe during a panel discussion this weekend at George Washington University in the U.S. capital.
Like Japan before it, Europe is on the verge of a lost decade – “15 years of deflation and dismal economic performance” – the former U.S. treasury secretary and Harvard economist declared dramatically. The fact that Germany needs to do more to stimulate the economy is not just the view of a “bunch of crazy Keynesians;” that’s what the International Monetary Fund believes too, he argued.
Germany’s finance minister was caught shaking his head during much of the debate, seemingly in resignation about the fact that U.S. economists continue to claim the answer to the debt crisis is to issue new debt. “The financial crisis came from America,” Mr. Schäuble countered.
But his argument is losing supporters and Germany’s policymaker was a lonely figure at the IMF summit this weekend, which gathers finance ministers and central bankers twice yearly in Washington.
“Debt isn't always a bad thing.”
While the focus of the world’s financial elite had shifted away from the euro zone in the last few years, the currency bloc’s economic crisis was back in full force this weekend. The IMF said there is a 40 percent chance the euro zone could slip back into recession for the third time since 2008. With annual consumer prices at just 0.3 percent, deflation in the euro zone is also a real danger.
Mr. Schäuble and his fellow German policymakers were the focus of criticism of Europe’s failure to revive growth and in almost every conversation they had, it seemed like there were calls for Germany to do more. Fears of another recession in Europe have revived the debate over the right balance between austerity and stimulating growth.
IMF Managing Director Christine Lagarde suggested increased investment, primarily by Germany, could help allay the “serious risk” of recession in Europe. Canadian Finance Minister Joe Oliver warned of the risks of deflation in Europe. With even Germany itself in danger of slipping into a recession in the third quarter, French Finance Minister Michel Sapin pointedly noted that “no country is immune” to crisis.
A few years ago, Mr. Schäuble was standing on firmer ground. Germany was seen as a model for other European countries to follow, a country that had managed its finances while other countries allowed their deficits to balloon out of control. When Europe’s debt crisis first broke in 2009, most agreed that curbing budget deficits was the priority.
This is no longer the case. Mr. Schäuble’s determination to run a budget without any new government debt in 2015 now appears to be viewed as the height of irresponsibility. Germany seems increasingly isolated on the IMF’s decision-making executive board, according to the U.S. delegation.
Mr. Schäuble’s central banking counterpart, Jens Weidmann, president of the Bundesbank, casts a similarly lonely figure on monetary policy. Behind closed doors, he was repeatedly urged to give up his opposition to the European Central Bank easing monetary policy further, for example by buying up government bonds on a massive scale. This comes as ECB President Mario Draghi, also in attendance in Washington, once again said the ECB has further measures up its sleeve.
Confronted with such a vocal alliance in favor of stimulating growth, Germany’s officials presented a united front of opposition at the meeting, urging their counterparts to look elsewhere for big measures to rescue Europe.
Mr. Weidmann defended the finance ministry’s debt-free budget for 2015, while Mr. Schäuble warned against fresh monetary policy experiments from the ECB, such as the quantitative-easing style program adopted in the United States. “The ECB has exhausted its monetary policy options,” Mr. Schäuble said.
“The goal of sustainable government debt should not be laid out to pasture.”
German officials also played down the world’s concerns about Europe’s dire growth rates. “We don’t share the IMF’s pessimistic forecasts,” Andreas Dombret, a board member of the Bundesbank, told Handelsblatt. The risk of deflation in the euro zone also remains “very limited” as the fall in prices is not broad-based, he said.
In Germany’s eyes, the euro zone crisis has been and remains a problem of high government deficits and low competitiveness. The prescription is structural reforms that create the right atmosphere for investment to return to the continent, as well as for banks to clean up their act.
“The goal of sustainable government debt should not be laid out to pasture,” Mr. Dombret said.
Mr. Schäuble indicated some willingness to take action. “We have to place more emphasis on investment once again,” he said. But he warned against making infrastructure investments simply for the sake of spending money.
“It’s the implementation, stupid,” was Mr. Schäuble’s line during the conference. He noted that the Europeans would put together a list of infrastructure projects by December. “We will fund everything in the way of concrete investment options,” Mr. Schäuble promised, although he did not reveal any details.
Germany’s spending will have to increase in the medium term, Mr. Schäuble also said. “But it won’t happen over night.” For now, he is determined that any potential additional spending should not threaten his goal of achieving a debt-free budget next year. “We would be foolish to jeopardize that now,” he stressed.
Even in German circles, Mr. Schäuble is casting an increasingly lonely figure. Jürgen Fitschen, co-chief executive of Deutsche Bank, Germany’s largest bank, advised Mr. Schäuble against fighting “alone against the rest of the world.”
“Yes, we have to lower debt, but this has to be politically acceptable,” Mr. Fitschen said over the weekend. “We have to be careful not to cause a recession.”
Axel Weber, a former head of Germany’s Bundesbank and now chairman of Swiss bank UBS, has not been much help either. While Mr. Weber has been a steadfast critic of the ECB’s loose monetary policy, he is also critical of the German government.
“Germany hasn’t brought a single reform measure to bear over the last 12 years,” Mr. Weber said.
This line of attack is especially damaging to Mr. Schäuble, who has pushed hard for other European countries to engage in non-stop structural reforms that will increase their competitiveness and make labor markets more flexible. Germany’s failure to make further progress in this area is not helping his argument.
The shift in this debate has allowed Anglo-Saxon economists like Mr. Summers to gain the upper hand. Speaking to Handelsblatt after the debate with Germany’s finance minister, Mr. Summers called on European governments to consider more debt-financed investments to revive growth.
“Debt isn’t always a bad thing,” he said.
Moritz Koch, Torsten Riecke and Jan Hildebrand are Handelsblatt economic correspondents and attended the IMF conference in Washington DC. Christopher Cermak is an editor for the Handelsblatt Global Edition in Berlin. To contact the authors: Koch@handelsblatt.com, Hildebrand@handelsblatt.com, firstname.lastname@example.org and email@example.com