Obama’s European Scorecard

Obama’s European Scorecard

Obama’s European Scorecard

07 April 2009
From The New York Times

External Author(s)
Josef Joffe, Tomas Valasek, Patrick Weil

Stopping the transatlantic rift

Stopping the transatlantic rift

Stopping the transatlantic rift

26 January 2011
From International Herald Tribune

External Author(s)
Tomas Valasek

Warsaw warms to Moscow

Warsaw warms to Moscow

Warsaw warms to Moscow

18 September 2009
From The Guardian

External Author(s)
Tomas Valasek

Germany owes Afghanistan an explanation

Germany owes Afghanistan an explanation

Germany owes Afghanistan an explanation

09 September 2009
From The Guardian

External Author(s)
Tomas Valasek

Time for the Export-Weltmeister to start consuming

Time for the Export-Weltmeister to start consuming

Time for the Export-Weltmeister to start consuming

Written by Simon Tilford, 13 February 2008

by Simon Tilford

Too many Europeans are blaming the US for the economic slowdown in Europe, as if everything would have been fine if only the Americans were not so irresponsible. This is complacent. The European economy would have faced a tricky rebalancing irrespective of the credit crisis. It is not sustainable for one group of EU economies to provide a disproportionate share of EU domestic demand while others run ever bigger current account surpluses.

Europeans are right to highlight the fact that the EU economy is a comparable size to the US one. However, European policy-makers and central bankers are on somewhat shakier ground when they queue up to claim that the EU economy is fundamentally more balanced that its US counterpart. Europeans should ask themselves the following question: would a US economy growing at the same pace as the EU economy did in 2007 be as easily rattled by a financial crisis in Europe and fall in the value of the euro as the European economy has been by the credit crisis in the US and the fall in the dollar? The answer is clearly no.

The European economy as a whole has become more flexible in recent years. Labour markets are now more efficient, employment rates (those employed as a percentage of the working age population) are up and many product markets are now much more competitive. These developments have helped accelerate the diffusion of new technologies. However, a look at the structure of EU economic growth demonstrates why the current recovery is so fragile, and why Europeans are wrong to focus so strongly on external shocks for explanations.

The UK and Spain, but also France and the new member-states have accounted for a very large share of the growth in EU domestic demand this decade. Consumption in these economies has grown more rapidly than output. The result has been a steady increase in their current account deficits. Spain’s hit an estimated 9 per cent of GDP in 2007, the UK’s 4 per cent, whereas deficits in Italy and France were around 2.5 per cent 1.5 per cent respectively. External deficits across the new member-states are big, in some cases startlingly so.

Over this period, another group of member-states led by Germany, but also including the Netherlands and Sweden, have seen their output expand much more rapidly than domestic consumption, with the result that their surpluses have ballooned. Germany’s and Sweden’s stood at 6 per cent of GDP in 2007, and that of the Netherlands was 7 per cent. Much of the rise in their combined surplus since 2000 has been with other members of the EU. In effect, these economies have been a huge drag on the European economy, and have not been, as they are sometimes erroneously portrayed, drivers of economic growth.

Economies cannot rely indefinitely on exports for economic stimulus, as other economies cannot run huge deficits indefinitely. A number of the countries that have generated strong growth in domestic demand must now rebalance their economies. The construction boom in Spain that has done so much to drive investment and private consumption in that country has ended and will depress Spanish consumption, perhaps for many years. For its part, the build-up of debt that contributed considerably to the strong performance of the UK economy in recent years has now run its course. France and Italy are in no position to take up the slack, not least because of their weak fiscal positions but also because they need to hold down wage settlements in order to prevent any further loss of competitiveness to the Germans. Neither are the new member-states, whose imbalances are starting to attract the attentions of the financial markets.

The countries that have relied on exports to the rest of the EU for a big chunk of their overall growth are going to have to rebalance and contribute to EU growth rather than being a drag on it. The prospects are not good. For example, for years German economists and politicians have been saying that Germany needed to regain competitiveness by ruthlessly holding down costs. This, they argued, would boost exports and feed through into investment and jobs. There has been a pick-up in investment and expansion of employment, but both remain vulnerable to a downturn in external demand because there has been no recovery in consumption. German private consumption actually fell in 2007 and domestic demand grew at half the pace of GDP. German real wages are likely to rise this year for the first time since 2003, but consumer confidence remains exceptionally low.

The EU needs to recognise that one of its core economic challenges is the excessive dependence of Germany and a number of other economies on exports to drive growth. The growth strategies of these countries should not be held up as examples for others to emulate. A huge current account surplus does not necessarily indicate an economy is ‘competitive’. It can also point to the weakness of domestic demand.

Simon Tilford is chief economist at the Centre for European Reform.

Comments

Added on 24 Apr 2008 at 16:53 by Leon avalos

i have to agree with asia with the good recipe against over population

Added on 17 Feb 2008 at 11:18 by Anonymous

Asia. I think it is important to not forget about that aspect.

But if asians got a substatial boost in their standards of living, that would level the playing field and benefit both EU and USA. The good news is that asians do not have anything against that, and it is a good and time tested recepie against overpopulation.

//steelneck

Missile strategy must not be seen as a retreat

Missile strategy must not be seen as a retreat

Missile strategy must not be seen as a retreat

09 September 2009
From Financial Times

External Author(s)
Tomas Valasek

Let's hear it for the Transatlantic Economic Council

Let's hear it for the Transatlantic Economic Council

Let's hear it for the Transatlantic Economic Council

Written by Philip Whyte, 23 May 2008

View the full insight article here

Economic liberalism in retreat

Economic liberalism in retreat

Economic liberalism in retreat

Written by Simon Tilford, 16 July 2009
From The New York Times

Can the next US president heal the transatlantic rift?

Can the next US president heal the transatlantic rift?

Can the next US president heal the transatlantic rift?

Written by Tomas Valasek, 19 September 2008

by Tomas Valasek

There are two schools of thought on what the election of a new US president will mean for transatlantic relations. The optimists argue that relations will improve significantly. They assume that much of the anger Europe feels towards the US is aimed at George W Bush rather than the country as a whole, and that once he leaves, US-European ties will revert to their normal, friendly terms. The pessimists disagree: they say that US and European outlooks on security are fundamentally different, that the next US president, whoever he is, will pursue a foreign policy similar to that of George W Bush, and that the relations may well worsen post-US elections as the Europeans, disappointed that president Obama or McCain does not turn out to be a multilateralist European liberal, turn their backs on the United States with a vengeance.

So when the German Marshall Fund released its annual Transatlantic trends survey last week, both the optimists and pessimists poured through the numbers in search of evidence for their respective hypotheses. On balance, the results tend to slightly favour the optimists, but much depends on who the Americans elect on November 4th.

The German Marshall Fund asked the Europeans directly whether they think that relations with the US would improve after the elections. Fourty-seven per cent of Europeans said ‘yes’ assuming Obama is the president. The reverse held true for McCain: only 11 per cent thought transatlantic relations would improve with him in the White House. But this reflects Europe’s strong preference for Obama rather than a dislike of McCain. Only 13 per cent of Europeans think that relations would worsen under McCain while a significant plurality - 49 per cent - expect them to remain the same. This suggests that Europe is adopting a ‘wait-and-see’ attitude on the Republican candidate.

Another useful way of gauging the impact of elections is to compare perceptions of the United States in Europe with attitudes towards George W Bush personally. Thirty-six per cent of Europeans support US leadership role in the world but only 19 per cent approve of George W Bush’s conduct in the office. This suggests that the 'Bush' factor reduces the Europeans’ support for the US by 17 percentage points – a percentage that Obama would certainly (and McCain possibly) pick up just by getting elected.

At this point the pessimists would point out that it does not matter what the Europeans think now. A pessimist would say that the Europeans do not understand how much continuity there is in US foreign policy. And that once Europe finds out that Obama or McCain’s foreign policy is more similar to George W Bush’s foreign policy than Europe’s - which it will be - even the most hardened Euro-optimists will feel disappointed.

That is a valid point. Obama’s victory in particular would be bound to generate expectations that no president could fulfil. So after an initial spike in European support for the US, there would come an inevitable decline. (With McCain, the Transatlantic Trends suggest, there would be little excitement in Europe initially, and hence less room for disappointment later if he turns out to be similar to the current president).

But none of this rules out the possibility of a long-term improvement in relations. It all depends on how the new president conducts himself in office. Past US presidents have managed to combine the US foreign policy tradition of assertive leadership with the Europeans’ preference for multilateral solutions and diplomacy. And so, presumably, could Obama and McCain.

Here are a few supporting numbers: in 2002, 64 per cent of Europeans approved of US leadership. (That number, as pointed out earlier, has dropped to 36 per cent today.) The major change since 2002, which accounts for the chill in transatlantic relations, was the war in Iraq. But six years on, Iraq has become a lot more stable and less salient as a political issue in Europe. It could largely disappear from transatlantic debates if Obama wins the presidency: he opposed the war all along, and has promised to withdraw US forces speedily if elected.

European support for US leadership stood at 64 per cent six years ago because previous US presidents have used US military power more delicately than George W Bush, and listened to the European allies a lot more attentively than the current president. That is precisely what Obama promises to do. (McCain says he will listen to Europe more but on some issues like Russia he sounds more aggressive than George W Bush.)

US foreign policy, contrary to the pessimists’ assumptions, is not bound to remain jingoistic - in fact, it has become a lot less belligerent in the last three-four years, during which the US opened talks with North Korea and endorsed Europe's nuclear diplomacy with Iran (for which president Bush, wrongly but understandably, has received no credit in Europe).

To win the Europeans’ hearts, the new president will have to show appreciation for the EU’s new role. As McCain or Obama will find out, Europe has changed much since George W Bush came to power. It no longer instinctively turns to the US when a crisis breaks out on or near the continent. The EU now takes care of most security problems on its own (except for large-scale crises, which still require NATO involvement). This new EU is not anti-American: 67 per cent of Europeans think that Europe should seek to work with the US rather than independently, say the Transatlantic Trends. So if the next US president seeks to work with his allies in Europe, he is likely to be received positively. Support for US’s leadership role would eventually inch up. And optimists among the Europeans would feel vindicated.

Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.

Comments

Added on 05 Oct 2008 at 20:02 by NickCrosby

I agree with most of what Tomas writes. Another point is the personal style/mentality of the two US presidential candidate. McCain:impulsive, military minded, 'maverick.' Obama: smooth, deliberative, consultative. Both decision modes have their weaknesses. One can lead to 'premature panic' or burning bridges ahead of you. The other: paralysis by analysis. But Europeans will instinctively warm to a consultative style.

Scapegoating the US lets others off too easily

Scapegoating the US lets others off too easily

Scapegoating the US lets others off too easily

Written by Simon Tilford, 02 October 2008

by Simon Tilford

Huge amounts have been said about the consequences of the credit crunch for the US and UK economies. They undoubtedly face major adjustments, and several years of very weak economic growth. There has also been trenchant criticism of spendthrift ‘Anglo-Saxons’ living beyond their means, derailing the global economy in the process. The US is a convenient scapegoat for politicians confronted with economic uncertainty, but it needs to be remembered that a number of European and East Asian economies benefited enormously from the credit boom. Indeed, it could not have happened without excess savings generated by the likes of China, Germany and Japan.

The credit booms in the US and UK, as well as in other countries such Spain and Australia, were not simply the result of poor commercial practices and policies in those countries. They were also the by-product of imbalances in the global economy. The US is regularly pilloried for running a large external (current account) deficit, for playing fast and loose with its currency, and hence for destabilising the global economy. This is misleading. The US did not cause the current problems all on its own. Those governments that believe a rising current account surplus is a symbol of national economic virility and competitiveness played a major role too. Indeed, their surpluses are the underlying cause of instability.

If some countries routinely run huge current account surpluses, others must run huge deficits. German and East Asian surpluses have to be invested somewhere and they got invested in housing and other assets in the US, UK and elsewhere. Criticism of the US Federal Reserve for pursuing an excessively weak monetary policy, and hence inflating asset prices is fine as far as it goes. But low interest rates were needed to encourage enough borrowing to soak up the excess liquidity produced by rising current accounts surpluses. Those condemning the US need to ask themselves where the global economy would have been without the demand generated by the US and other big deficit countries. China would certainly have grown much less rapidly and Germany and Japan would probably still be mired in economic stagnation.

Many in Germany, Japan and China argue that their dependence on the US is declining because the US accounts for a falling share of their respective current account surpluses. What they fail to notice is that the US has still been absorbing much of the liquidity that China, Japan and Germany have generated by running external surpluses with other economies. Furthermore, US demand has stimulated trade between other countries (for example, Chinese purchases of Japanese components or German machinery).

With credit conditions now tight and employment growth very weak, there will be a progressive narrowing of the US current account deficit (along with those of the UK, Spain etc). The governments that regularly criticise the US for the destabilising impact of its imbalances might not like the implications of this process. This unwinding poses a big problem for export-dependent economies. It exposes their domestic imbalances, which are just as much of a ‘problem’ as those of the US. An external surplus suggests that there are inadequate investment opportunities in an economy.

In a European context, it is imperative that the German government takes steps to rebalance the German economy. Domestic savings need to fall and investment needs to rise. Much is made of the competitive ‘gains’ the Germans have made in recent years and how this stands their country in good stead. Improved price competitiveness could help German firms to gain market share in the downturn, but collapsing export orders demonstrate that it will provide only so much support. Steep falls in investment in machinery and equipment and in purchases of cars in most of the country’s key export markets will hit the Germany economy hard next year.

The German finance minister, Peer Steinbruck, needs to spend more time thinking about how to address the country’s exceptionally weak domestic demand. Tax cuts would be a good first step. The German government needs to get over its obsession with fiscal probity. In the long-term, of course, fiscal discipline is a necessity, but at present it risks aggravating an already serious situation. China and Japan faces different challenges, but the underlying problem is one of excessive dependence on exports.

Unfortunately, there is little sign of any rethinking of economic strategy in these three economies. If anything, the problems experienced by the US have confirmed the belief that a competitive economy is one with a big external surplus and rising international reserves. This is bad news for everyone. Unless China, Germany and Japan make a net contribution to global demand, the world really could face a slump. Instead of gloating about the US’s comeuppance they should be considering what will drive their own and others’ economic growth.

Simon Tilford is chief economist at the Centre for European Reform.

Comments

Added on 08 Oct 2008 at 18:57 by Anonymous

Hi Simon,

Thank you for this interesting take on the situation. As a non-economist and lay person, I need help understanding something which you touched upon.

I believe you are speaking on a macroeconomic level with regard to trade and the "excess savings" of China, Japan, and Germany.

Can you tie it to a micro level--on individuals'/households' responsibility in this debacle? Various media talk about the massive savings rate of Japan, and I always thought they were referring to individuals who save by putting away yen in the bank (thereby providing banks with greater liquidity) instead of spending it on gadgets, travel, or what have you that Americans are always blamed for (and rightfully so).

Is there culpability on the part of Americans for their poor personal saving habits? If the US govt had continued with its deficits and international debt, but American citizens had saved a lot in the bank, would the picture today look much different?

In other words, does the average Joe who doesn't have a mortgage but spends more than he earns, using credit cards, etc. play a role in all of this? Or is he one of these "innocent" Americans the Congressmen have been railing on about as of late?

Thanks.

Syndicate content