Lack of Eurostimulus: Political or Structural?

It’s hard to visit Spain and not become alarmed about the economic situation in Europe. Certainly I became alarmed when I visited, and now Paul Krugman’s alarmed too. Of course what’s scary is all right out there in facts and figures, but walking around the streets and seeing massive discounts in every single store window as the country faces “a grinding process of wage cuts” that “will be almost inconceivably painful if, as seems all too likely, the European economy as a whole is depressed and tending toward deflation for years to come.” It’s doubly alarming because whatever you think of the Obama administration’s response to the situation, they certainly seem alarmed by it. The key European leaders, by contrast, are much more focused on the medium-term issue of regulatory reform than on short-term rescue measures.

At first glance, I agreed with Krugman that the problem here was fundamentally structural and institutional in nature. The EU has created a very integrated economic unit whose political institutions are far too puny to respond rapidly and effectively in a crisis. It’s as if we were running the modern-day United States under the Articles of Confederation. As Rick Hertzberg says, it’s conservative precepts of “states’ rights” and “small government” run amok.

More recently, I’ve started to have some doubts that this is the whole story. Krugman says that “to hear anything in America comparable to the know-nothing diatribes of Germany’s finance minister you have to listen to, well, Republicans.” Precisely because of that factor, and because Chancellor Angela Merkel is from Germany’s conservative party, I’ve heard several people mistakenly say that he’s a rightwing politician. In fact, he’s a Social Democrat—part of the national unity government in Germany is that the two most important ministries are in SPD hands, even as Merkel runs the show. The fact that Steinbruck has opinions on fiscal stimulus that would count as far right in the United States even though German political culture is generally less market-oriented than American points to a substantial difference of opinion on the merits about this sort of thing. And, indeed, though Steinbruck’s remarks about “vulgar Keynesianism” are well-known, it’s worth observing that Germany has hardly been the most stingy country on the continent in terms of fiscal stimulus. The French, who don’t shy away from state intervention in the economy, prefer to put their faith in more targeted ventures than in broad fiscal stimulus.

Meanwhile, the small European economies appear to me to be less interested in participating in a German-led coordinated stimulus than the Germans are in leading such a stimulus. Long story short, though it’s true that European institutions would make it challenging to put a Krugman-sized stimulus together, I’m not at all sure that this is the actual reason it’s not happening. In the United States, I think it’s pretty clear that were the institutional hurdles to stimulus smaller (i.e., majority rule in the Senate) the administration would have preferred somewhat more stimulus. In Europe, I think national government leaders are, except for Gordon Brown, more-or-less getting what they want.

I don’t have any real knowledge of the deep roots of this difference in political culture except to offer the customary tip ‘o the cap in the direction of German fear of hyperinflation. I would say, though, that Europe’s stronger welfare states mean that people don’t necessarily have the terror of economic downturn that exists in the United States. Recessionary conditions tend, in the U.S., to reduce inequality (the rich, having more money, stand to lose more) but cause the most intense suffering at the bottom because people slip through the cracks of our tattered safety net. In Europe, perhaps the downside risk to the working class is much less, reducing the pressure for stimulus, especially if the European business class shares the American business class’ evident (see, again, the Republican Party’s) distaste for Keynesian measures.

That said, Americans stopped paying attention to European politics on September 12, 2001 and are now waking up to find that we live in a world in which Jean-Claude Trichet rather than Ben Bernanke is arguably the world’s most important central banker. It’s also a world in which a revival in global demand probably needs to come from China rather than from a cuddly democratic ally.