The Atlantic Times, July 2010
We got rich by holding onto our money, not by spending it” – is an old adage German millionaires like to fall back on to explain how they became rich.
Now, President Barack Obama, a man Germans are used to idolizing, has turned this on its head.
“I am concerned by weak private sector demand and continued heavy reliance on exports by some countries with already large external surpluses,” he said in Pittsburgh, ahead of the G-20 Summit. “(These countries should) strengthen domestic sources of growth.”
In other words, what works for individuals doesn’t work for states, and especially not in this situation. Obama says we can get rich only by spending money, by giving it away.
The barb was partly aimed at China, which deflected the attack by hinting that it might, after all, allow its currency to float. But it was also aimed against Germany, with its weak domestic demand and its allegedly large surplus in trade with the US: $20 billion in 2009, compared to China’s surplus of $227 billion.
To avoid political damage to any of the leaders at the summit, the G-20 meeting in Toronto ended in a two-fold tie: No one got their way; no one was openly criticized. There was no agreement on either bank levies or a financial transaction tax. Instead, there were wishy-washy pledges to do more for economic growth and the unrealistic promise to cut national deficits in half by 2013.
The proverbial German “little guy” noted this outcome with disappointment. The same is true of the financial market reform agreed to by the US Congress, seen more as a lame compromise than a victory for common sense – the markets rewarded the initiative with strong gains on bank stocks.
What was going on in Toronto? The American president does not want to face a Republican landslide in the midterm elections in November and urgently needs to do something about soaring unemployment. If Europe fails to spend more money, it could choke off the upswing, warned Obama. He forcefully demanded public investment instead of budgetary discipline.
In other words, give your people more money so they can buy more, including foreign goods, including American goods.
The little guy in Germany, however, has a fairly clear picture of why the global economy was on the brink and possibly still is. First and foremost, the average Joe blames unscrupulous investors who take advantage of the markets’ roller coaster rides and the precarious situation of some states.
From this perspective, the public is left holding the check for their speculating errors without getting a cut of their post-crash winnings. That the Toronto summit failed to hold up a red flag to such shenanigans is something that looks to the average Joe like a backroom deal of the powers that be and with the moneyed interests.
To the average German, the American mentality of spending money you don’t have is something utterly alien. Even worse is spending for its own sake, at the expense of the environment and the climate. Where it will all lead to if public debt continues to climb – to an estimated 115 percent of GDP in the US by 2015; in Germany to 82 percent, according to the IMF. Germans would have to work a full year just to pay off the debt.
And the average Joe in Germany hasn’t forgotten where the crisis began – in the US. Which is why the president’s demands to force consumption at any price and propel public budgets even deeper into debt seem all the more bewildering to him.
Of course, the little guy in Germany would gladly take more money – but not from his government. He doesn’t want to leave behind debts for his children and grandchildren. He doesn’t want to have to answer the question: “How could you have done this to us?”
Germans want security. That is why they save. They have put €4.67 trillion into accounts, investment funds, insurance and securities. Set against that is about €1.8 trillion of public debt. And because the debit column grows each second by €2,500 – about an average monthly wage – the little guy currently has very little patience with politicians and big market players.
With a sigh of nostalgia, the average Joe thinks back to former German Finance Minister Peer Steinbrück’s realistic plan to present a balanced budget by 2011. Now, Steinbrück’s successor Wolfgang Schäuble has had to rack up fresh debt to iron out the damage that has been done, mainly due to events in the US.
The little guy is left scratching his head over the notion that the American president wants Germany to follow such a poor example. He can very well understand Schäuble’s observation that deficit spending has a “drug-like character.” In Germany too, cuts to government stimulus programs and subsidies face resistance from the deficit junkies.
The cash to prompt Germans to spend more will not come from the state. With the exception of The Left party and former Green Party Foreign Minister Joschka Fischer, Germans have recognized that budget consolidation and government handouts are mutually incompatible.
In this situation, the incentive for more consumption cannot come from the state but from higher net wages. To achieve that, the average Joe sees only one recipe: lower taxes for the average German and higher ones for the truly wealthy. The capacity is there. The number of dollar millionaires has recovered as quickly as it fell during 2008.
“Both the number of rich people and the value of their property are nearly at the levels they were before the crisis,” wrote Klaus-Georg Meyer of consultants Capgemini, citing the results of the latest World Wealth Report by Merrill Lynch, Bank of America and Capgemini. Globally, 10 million people are again worth a total of $40 trillion. The superrich share of this pie has increased. The trend is the same in Germany.
Most industrial firms in Germany are reporting positive business sentiment, driven mainly by exports, especially to Asia. Fewer German companies are going bankrupt. Bigger firms with more than €50 million in annual revenues have weathered the crisis better than expected. But the flood of defaults among small companies continues unabated.
German carmakers are celebrating surprisingly high demand and they’re hiring again. The Institute for the World Economy expects jobless figures to start falling steeply. In place of the five million unemployed feared only a few months ago, the Kiel-based think-tank now expects that number to fall below three million in the coming years.
Economic institutes have hiked their GDP growth forecasts for Germany to 2 percent this year. That will help raise purchasing power and demonstrates that Germany undertook reforms that other countries, if they want to improve their competitiveness, have yet to enact.
Over the past decade, the average Joe has played a central role in Germany’s industrial recovery by forgoing big wage hikes. Try explaining to him why this investment in the future should be allowed to melt away because of the mistakes and recklessness of others.
Last year, private sector wages did finally rise again in Germany, by an average 2.7 percent. When policymakers establish trust with the right approach, even Germans will start opening their wallets more.
For the average Joe, then, the way forward is practically the opposite of what Obama wants. Consolidate the budget, cut taxes at the bottom end of the wage scale and put the thumbscrews on speculators. Then, Germans just might regain confidence in the future and stop hoarding their money.