Thursday, July 10, 2003
The Trans-Atlantic Union is apparently stronger than most people think...
Germany and California: Parallel crises in need of parallel remedies Robert Levine IHT
Thursday, July 10, 2003
VAISON LA ROMAINE, France Two major states, one with the world's third largest economy, the other with the sixth, are in severe economic and political trouble. Both are experiencing economic reversals which, combined with political failures, are resulting in budget gaps; their leaders, elected recently with small majorities, have become unpopular.
The parallel problems of Germany and California stem from parallel causes. Solutions must also run parallel, although the very different institutional settings will require different modes of implementation. In both cases much of the policy must be made at higher levels by the federal institutions of the European Union and the United States.
The similarities between the two states are striking. Although Germany has more than twice the population of California, both are medium-sized as compared to the world's few giants, or to the much smaller states of the European Union and the United States. Their economies are similar in size - Germany's gross domestic product is about 2 trillion euros, California's slightly less than three-quarters of that.
Both are in economic trouble mainly because of the over-extension and collapse of the information technology boom. Both the boom and the collapse started in California; the magic of international trade and investment spread them worldwide, with Germany, as a major exporter, following closely from the start.
When the boom brought increased tax revenues, both governments played butterfly rather than ant, cutting tax rates and increasing spending rather than storing reserves for the future. That helped reelect Chancellor Gerhard Schröder and Gov. Gray Davis. But personal unpopularity kept their margins low, and their inability now to cope with the downturn has reduced their popularity to the 20 percent range. Schröder's government is in frequent danger of collapse, and Davis may be recalled from office.
In any case, changing leadership cannot change economics. Schröder and Davis, or their successors, must deal with sick economies and burgeoning budget deficits. Public policy cannot bring a new boom: the next technological frenzy will come when it comes. But government can meliorate the worst effects and frequently reverse short-run directions. The two major tools are monetary policy, cutting interest rates to encourage private borrowing and spending; and fiscal policy, encouraging private spending by cutting taxes and/or increased public expenditures.
Cutting taxes or increasing government expenditures, however, will increase deficits that are already high. Therein lies a problem that must be solved differently in the different institutional settings of the two states. In Germany, deliberate deficit finance could help fight the downturn and is possible, at least in principle; in California it is unlikely to be either helpful or possible.
Government spending in Germany runs close to half of gross domestic product. A one percent increase in the deficit, multiplied by increased spending from the beneficiaries of tax cuts or expenditure increases, would have a significant impact. California's budget is only 5 to 10 percent of the gross domestic product; increased deficits would have little effect. Further, deficits must be financed by printing money, or borrowing; California cannot print dollars, and it must borrow on the private market, which has signaled its doubts through reduced bond ratings and increased interest rates.
In sum, fiscal policy can do little to improve California's economic situation. Its financial position, the penalty for earlier irresponsibility, can be improved only by distasteful measures - increased taxes and reduced expenditures.
Germany suffers from a surfeit of responsibility. It has imposed on itself and on the European Monetary Union a strict limit on deficits, which precludes active fiscal policy. Deliberate deficits, although long eschewed, were once possible: Germany could print deutsche marks and borrow from its Bundesbank. Now it cannot print euros and the possibilities for borrowing from German banks are limited. The last resort is the European Central Bank, an ultraconservative institution ferociously dedicated to combating deficits, which refuses to use monetary policy to meliorate the downturn.
Germany's solution lies in changing national fiscal policy and European Monetary Union policy, which may be politically possible if Europe's malaise continues. California's budget situation is in its own hands, but economic melioration depends on the federal government. At $2 trillion, the federal budget plays a huge role. Current federal deficits, although they may be irresponsible in the long run, are providing needed short-run stimulus; the Federal Reserve's monetary policy, far more flexible than the European Central Bank's, is helping California and the other 49 states.
Germany and the other soon-to-be 25 states of the European Union must still fend for themselves fiscally, without the central bank's assistance. That is not going to help much, in the short run or the long.
The writer, a former official in the U.S. executive and legislative branches, is an economist and defense analyst.
Germany and California: Parallel crises in need of parallel remedies Robert Levine IHT
Thursday, July 10, 2003
VAISON LA ROMAINE, France Two major states, one with the world's third largest economy, the other with the sixth, are in severe economic and political trouble. Both are experiencing economic reversals which, combined with political failures, are resulting in budget gaps; their leaders, elected recently with small majorities, have become unpopular.
The parallel problems of Germany and California stem from parallel causes. Solutions must also run parallel, although the very different institutional settings will require different modes of implementation. In both cases much of the policy must be made at higher levels by the federal institutions of the European Union and the United States.
The similarities between the two states are striking. Although Germany has more than twice the population of California, both are medium-sized as compared to the world's few giants, or to the much smaller states of the European Union and the United States. Their economies are similar in size - Germany's gross domestic product is about 2 trillion euros, California's slightly less than three-quarters of that.
Both are in economic trouble mainly because of the over-extension and collapse of the information technology boom. Both the boom and the collapse started in California; the magic of international trade and investment spread them worldwide, with Germany, as a major exporter, following closely from the start.
When the boom brought increased tax revenues, both governments played butterfly rather than ant, cutting tax rates and increasing spending rather than storing reserves for the future. That helped reelect Chancellor Gerhard Schröder and Gov. Gray Davis. But personal unpopularity kept their margins low, and their inability now to cope with the downturn has reduced their popularity to the 20 percent range. Schröder's government is in frequent danger of collapse, and Davis may be recalled from office.
In any case, changing leadership cannot change economics. Schröder and Davis, or their successors, must deal with sick economies and burgeoning budget deficits. Public policy cannot bring a new boom: the next technological frenzy will come when it comes. But government can meliorate the worst effects and frequently reverse short-run directions. The two major tools are monetary policy, cutting interest rates to encourage private borrowing and spending; and fiscal policy, encouraging private spending by cutting taxes and/or increased public expenditures.
Cutting taxes or increasing government expenditures, however, will increase deficits that are already high. Therein lies a problem that must be solved differently in the different institutional settings of the two states. In Germany, deliberate deficit finance could help fight the downturn and is possible, at least in principle; in California it is unlikely to be either helpful or possible.
Government spending in Germany runs close to half of gross domestic product. A one percent increase in the deficit, multiplied by increased spending from the beneficiaries of tax cuts or expenditure increases, would have a significant impact. California's budget is only 5 to 10 percent of the gross domestic product; increased deficits would have little effect. Further, deficits must be financed by printing money, or borrowing; California cannot print dollars, and it must borrow on the private market, which has signaled its doubts through reduced bond ratings and increased interest rates.
In sum, fiscal policy can do little to improve California's economic situation. Its financial position, the penalty for earlier irresponsibility, can be improved only by distasteful measures - increased taxes and reduced expenditures.
Germany suffers from a surfeit of responsibility. It has imposed on itself and on the European Monetary Union a strict limit on deficits, which precludes active fiscal policy. Deliberate deficits, although long eschewed, were once possible: Germany could print deutsche marks and borrow from its Bundesbank. Now it cannot print euros and the possibilities for borrowing from German banks are limited. The last resort is the European Central Bank, an ultraconservative institution ferociously dedicated to combating deficits, which refuses to use monetary policy to meliorate the downturn.
Germany's solution lies in changing national fiscal policy and European Monetary Union policy, which may be politically possible if Europe's malaise continues. California's budget situation is in its own hands, but economic melioration depends on the federal government. At $2 trillion, the federal budget plays a huge role. Current federal deficits, although they may be irresponsible in the long run, are providing needed short-run stimulus; the Federal Reserve's monetary policy, far more flexible than the European Central Bank's, is helping California and the other 49 states.
Germany and the other soon-to-be 25 states of the European Union must still fend for themselves fiscally, without the central bank's assistance. That is not going to help much, in the short run or the long.
The writer, a former official in the U.S. executive and legislative branches, is an economist and defense analyst.
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