Tuesday, April 07, 2009

Germany (1) – USA (0)

Not only do Germans along with French were able to stop the Obama stimulus gravy train in London G20, they also got what they wanted: - SDRs for other countries and insistence on wide range financial regulations. There is some merit in German and French argument that Europe has wider and expensive social safety net in place and as such substantial fiscal stimulus does happen automatically as more unemployed are supported by the state. Same goes for their health care and education support. Continental Europe has superior government funded social network is the fact and then it is legitimate for these countries to count expenses on that account (which increase in recession) as a kind of stimulus funding.

About SDRs - primarily it will help other countries of the world in global trade which is favorably stacked for export driven economies like Germany.

About financial regulations – it is more of how to prevent future problems rather solving today’s issue. Besides, the kind of bold initiatives (global equivalent of FDIC, complete regulation of rating agencies, sharing of information about capital flows, executive compensations and controlling credit default swaps, controlling hedge funds; etc.) needed here will take time and most players on the table will have to agree / contribute to that. It is unlikely that as such systems evolve over multiple years, any one country or block of countries will be able to claim the victory.

So it is all about ‘stimulus package’ (where German conservatism against printing more currency has won) and SDRs. Germans essentially have been able to achieve their goals and have been able to stunt Uncle Sam. It is Germans 1 – 0 leading USA in this case.

But issues like long term imbalance of global economy which contributed to this crisis (apart from regulation failure in America) – those are not addressed. Chancellor Merkel is on record saying that Germany many not want to stir away from their reliance on export. How is then in the end problem will be solved? It will not be.

Americans failed in regulations during this credit boom and hence brought down their own economy as well as the global economy. As the leader of the pack, America was supposed to be and expected to be more vigilant with regulations and controlling speculation. (In a way Germany is showing exactly such a kind of badly needed discipline in not being ‘bailout king’ of Europe for all other countries.) But one thing that is to be noted is Americans do not depend so much on export. It is always the internal demand which drives American economy. As America finds ways to ignite internal demand without the credit excess (big if, but our Bernanke is in the thick of waging that war and there are no signs that he is loosing it badly; jury is out); American economy will improve without so much of export reliance. If Dollar falls, added exports will be icing on the cake for Americans. But that is not the case for Germans – apart from their strong balance sheet / less debt to GDP ratio – their reliance on exports and unwillingness to go away from that can create problems. Clearly the next round will be decided by whether Germans mend ways to veer away from exports to stimulate internal demand or whether Americans kick up internal demand without credit excesses.

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