A more ominous interpretation...

...is that the largest companies in the Euro area do not wish to throw good money after bad.

CONTINENTAL DRIFT
by James Surowiecki
MARCH 30, 2009

In American politics, “Europe” is usually a code word for “big government.” So in the midst of a global recession, with the U.S. and China shelling out trillions in fiscal stimulus, you might expect that European governments would be spending furiously, too. Far from it. While the U.S. is devoting almost six per cent of its G.D.P. to fiscal stimulus, France and Germany are spending a barely noticeable twenty-six billion euros and fifty billion euros, respectively. Whereas the U.S. hopes that the upcoming G20 summit will lead to a global stimulus package, European policymakers have been warning against the dangers of “crass Keynesianism.” The U.S. Federal Reserve has been flooding our economy with money, but the European Central Bank has cut interest rates slowly and reluctantly. Far from wild-eyed leftists, Europeans are looking downright conservative.
Europe’s response has earned it plenty of criticism, with pundits arguing that its politicians are oblivious of the seriousness of the crisis. There may be some truth in this charge, but Europe’s caution also reflects important differences between its economy and ours, as well as a profoundly different attitude toward things like inflation and debt. If European and American policymakers seem, in their public statements, to be dealing with two very different financial crises, it’s because, in some sense, they are.
To begin with, the biggest European countries, which have the most influence on policy, have not been crushed by this recession. In countries like Ireland and Spain, where huge housing bubbles burst, the devastation has been immense. But in Germany, where there was no bubble, fewer people are struggling with debt or watching their wealth go up in smoke. To be sure, Germany’s economy, which is heavily dependent on exports, is not in good shape; it looks set to shrink more this year than the U.S. economy. But the unemployment rate in Germany has risen much less than it has here. Indeed, in most of Europe job losses have been less severe, in part because unemployment was already quite high. The U.S. unemployment rate has risen nearly three percentage points since January, 2008. Europe’s is up barely one per cent.
In addition, since most European countries have an elaborate social safety net, a recession has a less dramatic impact on people’s daily lives. In the U.S., unemployment insurance pays relatively little and runs out relatively quickly, so losing a job usually means a precipitous decline in income. In European countries, unemployment benefits are typically substantial and long-lasting. This is not entirely a plus—it probably makes unemployment higher than it otherwise would be—but in hard times it keeps money in people’s pockets. (And paying for it means that European government spending automatically rises quite a bit during recessions.) Furthermore, universal health care enables Europeans to see a doctor even if they’re out of work.
None of this means that Europeans are indifferent to recessions or unemployment. But it does reduce the pressure to get their economies moving again at any cost. Furthermore, there seems to be an underlying difference in psychology. Americans talk a good game about the need for balanced budgets and fiscal responsibility, but we’ve proved ourselves happy to borrow trillions in order to maintain our life styles. And, while Americans hate inflation, they love economic growth more: the Federal Reserve’s mission is not just to fight inflation but also to maximize employment. Europe runs a much tighter ship: if an E.U. member has a deficit of greater than three per cent of G.D.P., it’s subject to disciplinary action. And the European Central Bank has only one mandate: keep inflation low.
European economic policy seems to reflect the conviction that inflation, not stagnation, is the greatest threat to an economy. If the episode that haunts the U.S. is the Great Depression, in Europe, where the Germans have been dominant in shaping economic policy, the defining historical moment is the hyperinflation of Weimar Germany, when prices rose more than seventy-five billion per cent in just one year, 1923, and, in the words of Walter Benjamin, “trust, calm, and health” vanished. The legacy of that episode lives on not just in German policymakers’ inflation phobia but also in their sense that there is something fundamentally distasteful about debt. For Germany, fiscal rectitude even in the face of a crisis is not just economically sensible but morally correct.
There’s a price to be paid for hostility toward fiscal stimulus and easy money: Europe and, arguably, the world will take longer to recover. But European policymakers seem willing to weather this outcome in exchange for stability. They’re also probably counting on the fact that, even as they sit tight, their economies will get a boost from the American and Chinese stimulus packages. The thing about government spending is that it “leaks”: a good chunk of our stimulus package will buy other countries’ goods. So Europeans can avoid getting too deeply into debt and still reap some of the benefits of our borrowing. This is unfair: in effect, Europe is refusing to carry its share of the global economic burden and is piggybacking on us. But it’s hard to see how things could have turned out otherwise. The U.S. economy, much more than Europe’s, is like the proverbial shark: if it doesn’t keep moving forward, it dies (or at least creates a lot of misery). In some sense, we need economic growth more than Europe does. It’s not surprising that we’re going to be the ones who end up paying for it. ♦