Summary: Both Europe and the United States face enor-mous and unsolved long-term economic and financial prob-lems. Both sides are convinced that the other is doomed. In the United States, for Repub-licans, Europe has too much debt, whereas for Democrats, it does not have enough. On the other hand, there is a broad consensus among Euro-peans that the decline of U.S. power and economic might is inevitable. If we agree that the current crisis is a transatlantic one and that it is best solved in a transatlantic context, there are at least two things to be done. First, remove all unnecessary hurdles to transatlantic trust. Second, complete a transatlantic free trade zone and sell the project to an increasingly skep-tical public.

Foreign Policy ProgramPolicy Brief

When the Music Stopped: Closing the Transatlantic Gap in Economic Thinkingby Nikolaus Piper

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May 2014

It was a first of its kind. In its semian-nual “Report to Congress on Interna-tional Economic and Exchange Rate Policies,” released in October 2013, the U.S. Treasury Department named Germany as the main culprit for economic imbalances in the world. Not the People’s Republic of China, as in former reports, but the Federal Republic, one of the United States’ closest allies. “Germany has main-tained a large current account surplus throughout the euro area financial crisis,”1 the report said, “and in 2012, Germany’s nominal current account surplus was larger than that of China. Germany’s anemic pace of domestic demand growth and dependence on exports have hampered rebal-ancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment. The net result has been a deflationary bias for the euro area, as well as for the world economy.”2

A “deflationary bias”: those were clear words. U.S. economist Paul Krugman’s routine criticism of 1 U.S. Department of the Treasury. (October 30, 2013). “Report to Congress on International Economic and Exchange Rate Policies.” Washington, DC: U.S. Government Printing Office, 3. http://www.treasury.gov/resource-center/international/exchange-rate-policies/Doc-uments/2013-10-30_FULL%20FX%20REPORT_FINAL.pdf 2 Ibid.

“over-saving” Germans seemed to have become the official position of the Obama administration. Such criticism is not new. Since President Jimmy Carter, the U.S. administration has pressed the Germans time and again to spend more and to pull the world economy like a “locomotive.” Obama’s first secretary of the treasury, Timothy Geithner, travelled to Berlin to tell Angela Merkel and Wolfgang Schäuble that Germany should play a much more active role in solving the euro crisis, i.e. put more money at risk. But naming and blaming in a Treasury report is something altogether different. The German reaction to the October 2013 report was one of indignation and of feeling misunderstood. “We have always been a strong export nation,”3 said Ilse Aigner, a rising star in the conserva-tive Bavarian conservative party CSU, the sister organization to Angela Merkel’s CDU. “And we are proud of it.”4 In a way, it seemed that Germans felt like a student striving to be best of class and who now are being criti-cized by an underperforming teacher for being overachievers. The German reaction reveals a deep disappoint-

3 Heller, G., & Marsh, S. (October 31, 2013). “Germany Rejects U.S. Criticism of Export Reliance.” Reuters. http://www.reuters.com/article/2013/10/31/us-germany-usa-trade-idUSBRE99U0M920131031 4 Ibid.

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ment with the United States, to say the least. One can doubt the wisdom of the economists in the Treasury; after all, the problems with German austerity that they were complaining about have been mitigated in the course of 2013. But the German reaction nonetheless showed a good helping of vanity and economic illiteracy.

All this was taking place against the background of the NSA spying scandal that brought the approval ratings of President Obama in Germany to a record low, placing a severe strain on German-U.S. relations. The love affair between the German public and the U.S. president is definitively over. There is mistrust growing on both sides of the Atlantic. The gap is widening, a dynamic driven not only by a different view on realities of the 21st century, but also by different values and a different awareness of what is dangerous in the world and what is not. To be sure, the revelations of Edward Snowden are more profoundly affecting the views of most people, at least in Germany, than the gaps in economic thinking. But the latter are at least as important. In the long run, the NSA scandal will be overcome, one way or the other. But the deep divide in economic thinking will not disappear by itself, as it repre-sents a much more fundamental disagreement. Action is needed.

Both Europe and the United States face enormous and unsolved long-term economic and financial problems. The financial crisis and the Great Recession gave both sides a glimpse at these problems. Most visibly is the heavy debt burden that nearly all nations on both sides of the Atlantic are now facing. Never before in peacetime were industrialized nations as a group as indebted as today. But the invisible part of these problems reaches to the core of democratic societies: There is a huge disparity between what people expect from their government and what they are willing to pay for it.

In the transatlantic context, there is a remarkable absurdity added. Both sides are considering the problems of indebt-edness to be something specific to the other side respec-tively. Or, to put it simply, both sides are convinced that the

other is doomed. There is a phrase that is still resonating from the 2012 U.S. presidential campaign. After winning the New Hampshire primary in January 2012, then-Republican candidate Mitt Romney depicted the Obama administration as a reflection of “the worst of what Europe has become.”5 Mitt Romney never told us what “the worst of Europe” exactly constitutes. But he is by no means alone in his opinion. For many conservative Americans, “Europe” has become a metaphor for economic, social, and political failure, for stagnation, bad demographics, and an overly generous welfare state that kills all incentives to work and innovate. In other words, Greece is the future of Europe.

Many Democrats also believe in the fall of Europe, but for exactly the opposite reasons. As mentioned in the Treasury report, many in the administration maintain that Germany is hindering progress in Europe because it does not spend enough. In short, for Republicans, Europe has too much debt, whereas for Democrats, it does not have enough.

On the other hand, there is a broad consensus among Europeans that the decline of U.S. power and economic might is inevitable. Particularly intellectuals in France and Germany are convinced that U.S. style capitalism has no future, and that we are in need of something different. The shelves in German book stores are packed with books about the inevitable U.S. decline. “The United States has become a danger for world peace and the global currency system,” one German author writes. The fact that the U.S. Treasury is pressing Germany into spending more and issuing more debt may add to this grim picture. And the negative cliché of the United States has been reflected in recent developments: the repeated partisan war over the debt ceiling, the government shut-down last fall, and the ongoing struggle about Obamacare. Is extreme partisan-ship in Washington not a clear signal for U.S. decline? And was the financial crisis, which started in the U.S. housing market, not a clear indication of what is to come? “It is the beginning of the end of the American empire,” as one left-wing blogger put it.

In Europe as well as in the United States, prejudice trumps reality. Of course, neither the United States nor the EU or Germany is doomed. For sure, formidable problems persist, but we can solve them, provided we want to.

5 Boxer, S. (2012, January 10). Romney Hits Obama Hard, Paints Himself as Presump-tive Nominee. CBS News. http://www.cbsnews.com/news/romney-hits-obama-hard-paints-himself-as-presumptive-nominee/

Never before in peacetime were

industrialized nations as a group

as indebted as today.

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But why is it not only important that Europeans and Americans solve their own problems, but that they also regain their ability to communicate to each other about their respective problems? Ask George Kennan, the great U.S. diplomat of the 1940s and 1950s. In his epic biography, the Pulitzer-Prize-winner John Gaddis quotes Kennan with some surprising remarks on transatlantic relations. It was in 1947, just the time when the Marshall Plan for Europe was in the making. Kennan was collecting arguments for the United States to help Europe. The point was not only, wrote Kennan, to enable the Europeans to exist without charity so “that they can buy from us” and “have enough self-confidence to withstand outside pressure.” More funda-mental was the traditional concept of U.S. security, which had assumed that a Europe of free states would be subser-vient to no great power. Then he added something that was not self-evident at all.

If Western Europe fell under a communist dictatorship, Kennan wrote, “the United States, in common with most of the rest of the world, would suffer a cultural and spiritual loss incalculable in its long term effects.” The American people were “bound to be influenced by whether the Euro-pean nations are doing a good job helping themselves.”

George Kennan’s point is crucial. Without Europe, the United States would suffer from a cultural and spiritual loss. This phrase is valuable the other way round as well: Europe is doing much better with a vibrant the United States that lives up to its intellectual capacities. The trans-atlantic alliance is more than NATO; it is a partnership to solve common problems. To be aware of this is more important today than ever. Will this alliance still be able to shape the economic future of the world? For too long, we have all taken economic cooperation across the Atlantic for granted. We should not.

How should the West deal with a neighbor that is willing to turn the clock back to the days of the Cold War? Will the United States and Europe, particularly Germany, be able to act in concert and impose meaningful sanctions on Russia? Or will the crisis cause further damage to the Western alli-ance?

The first step is to realize that we have a common problem. Over decades, the debt-to-GDP ratio in nearly all nations on both sides of the Atlantic has been rising. Both the EU and the United States amassed a public debt stock close to their respective annual GDP. The debt-to-GDP-ratio in

the EU is at 89.8 percent,6 in the United States, it is 110.6 percent.7 The European numbers vary between 175.28 percent in Greece and 10.29 percent in Estonia, with the core nations France (94.0 percent)10 and Germany (81.1 percent)11 closer to the upper and more problematic end of the scale.

On the U.S. side, federal debt makes up the biggest chunk, but the situation has improved a bit with the ongoing recovery. At least as important, however, is the situation in the states and municipalities. The bankruptcy of Detroit is a clear warning. Not all cities are as poorly managed as the Motor City, but the underlying reasons of Detroit’s downfall are found in other cities as well: soaring costs for Medicaid, for pensions, and an eroding tax base. Bad news is also coming from heavily indebted Puerto Rico, whose credit rating was recently downgraded. Last year, Richard Ravich, the banker who helped save the city of New York from bankruptcy in 1975, and Paul Volcker co-authored a report of what they called the State Crisis Task Force. Surprisingly, the report received little to no attention in the U.S. media.

Here is what Ravich and Volcker found: the retirement funds of teachers, fire fighters, and policemen in the United States are underfunded by no less than $1 trillion. New York City alone has $85 billion in unfunded liabilities to its retirees. The underfunding of pension plans is equivalent to 6 to 18 percent of GDP, which technically should be added to the official debt-to-GDP rate of 110.6 percent. Further-more, Medicare is underfunded by $1 trillion and while the cost of Medicaid will rise by 8.1 percent annually until

6 Directorate General for Economic and Financial Affairs (Spring 2013), “European Economic Forecast,” http://ec.europa.eu/economy_finance/publications/european_econ-omy/2013/pdf/ee2_en.pdf7 lbid8 lbid9 lbid10 lbid11 lbid

The transatlantic alliance is more

than NATO; it is a partnership to

solve common problems.

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the end of the decade,12 the revenue side is only projected to increase by 3.9 percent. Last year, Medicaid surpassed primary and middle schools as the largest state expenditure for the first time in history.

The United States may be a younger society than Germany or Italy, but it is nonetheless aging. If the Congressional Budget Office’s projections are right, the number of Social Security beneficiaries will rise from 57 million today to 76 million in 2023 and 101 million in 2038. The problems of a welfare state in difficult times, always thought to be exclu-sively European, will haunt the U.S. society as well. The problems will come later than in Europe (where they can already be felt), but they will hit a country less prepared to tackle them than countries like Sweden, the Netherlands, or Germany.

All these problems are well known. The CBO is, after all, not an obscure organization. But the impact of these facts is widely ignored in Washington’s partisan politics. The endless political fighting surrounding the government shutdown, about raising the debt ceiling and avoiding the so called fiscal cliff dealt with today’s deficit (plus Obam-acare), but not with the years 2023 or 2038. It is a strange form of short-termism. Republicans press the White House to cut deeply into the federal budget of today, but this would endanger success in dealing with the long-term problem.

It is a short-termism that is well-known from Europe, and Americans have complained about it rightfully. The euro crisis over the course of years was a painful exercise of elected officials muddling through and not daring to tell the truth to their electorate. For the moment, the euro crisis seems to be tamed, but with a classical short term measure — the monetary fire-hose. Mario Draghi, head of the European Central Bank (ECB) promised to do “what-ever it takes”13 to defend the European currency. Financial markets are as happy with this promise as they were with quantitative easing by the Federal Reserve in Washington.

Last fall, German political parties added another example of short-termism of a specific Teutonic kind. In September 2013, Angela Merkel and her center-right CDU carried

12 Department of Health & Human Services, 2011 Actuarial Report on the Financial Outlook for Medicaid, p. iv

http://medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Financing-and-Reim-bursement/Downloads/medicaid-actuarial-report-2011.pdf13 Reuters, July 26 2012, “Draghi sends strong signal that ECB will act,” http://www.reuters.com/article/2012/07/26/us-eurozone-ecb-draghi-idUSBRE86P0HM20120726

a convincing electoral victory, but it came at a price: the chancellor lost her coalition partner, the pro-business FDP. As a result, the CDU had to form a grand coalition with center-left Social Democrats (SPD). The stunning core of their coalition pact is the dismantling of some of the reforms that were responsible for the latest economic success of Germany. Starting in 2015, Germany will introduce a national minimum wage of 8.50 euro. Most certainly, this wage will make it more difficult for young adults with a poor education and the long-term unem-ployed to enter the labor market. Additionally, German workers will receive a higher minimum social security payment (“Mindestrente”) for those who only paid low contributions during their active work life. The idea as such is not bad, but additional funds for the new entitlement are supposed to come from the pension system itself. This in turn means that previous savings in the system, realized by former reforms, will be spoiled again.

Why are the coalition partners doing this? They are mostly undoing reforms because the Social Democrats are scared witless. The SPD implemented the reforms of the German welfare state with the so-called “Agenda 2010” in 2004, only to be punished terribly at the next election. Back then, the party lost its governing majority and had to watch the rise of a dangerous competitor on the far left: the party called “Die Linke” (“The Left”) is comprised of East German post communists, West German leftists, and social democratic defectors. As a consequence German politics moved from a four-party to a five-party system, which diminished political options for the SPD. There are lessons from this experience for everyone in Berlin. Long-term perspectives don’t pay off; populism fares much better.

And this brings us back to the United States. Since the financial crisis, the nation has experienced a remarkable surge of populism. The Tea Party is deeply rooted in many

The euro crisis over the course

of years was a painful exercise of

elected officials muddling through

and not daring to tell the truth to

their electorate.

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U.S. political traditions. Out of a deeply felt discontent with the course of the country, thousands rallied behind fierce anti-government slogans, that have, at least for European ears, a grotesque undertone. Uncontested in this respect is the slogan that was shown at a Tea Party Rally in 2009 in upstate New York: “Cut Taxes, Not Defense!” It is an absurdity that is difficult to beat. Meanwhile there is also a new brand of left-wing populism linked to politicians like Senator Elisabeth Warren (D-MA) or, even more important, Bill de Blasio, the new mayor of New York City. He carried a landslide victory because a majority of New Yorkers felt a deep discontent with the state of the city.

The extreme short-termism on both sides of the Atlantic is an indication of how similar the problems are that both sides are facing. At the core of the current crisis is a lack of consensus about what citizens expect from government and what they are prepared to give to their governments. That is true in stagnant and cynic France, but it is also true in Germany. The most important issue for many Germans is not how to create growth or jobs, but “Steuergerechtig-keit,” or “tax fairness.” Tax the other guys.

Americans historically relied less on government than Europeans, but the difference is smaller than one would expect. Last year, the U.S. public expenditure quota, or the share government takes from the U.S. economy, was at 42.2 percent. Germany’s is 45.0 percent.14 There is no question that government played a decisive role in transforming the United States into the greatest nation on earth. It started with land grants and continued with public schools, the Interstate highway system, the conquest of the moon, and a U.S. military that today is second to none. Throughout U.S. history, the size of government was always contested, but in today’s Washington, conservatives and liberals cannot even 14 The Heritage Foundation and The Wall Street Journal, “2014 Index of Economic Free-dom” http://www.heritage.org/index/country/germany

agree on the facts they are battling about. Therefore, today we are witnessing one of the least productive Congresses in history, the sequester, the endless fighting about “Obam-acare,” etc. As The Economist famously put it, Republicans moved to the unthinking right, Democrats moved to the unreformed left.

The Tea Party may have energized the GOP, but when it comes to day-to-day politics and the practical conse-quences of lean government, the base for radical libertari-anism is eroding quickly. The Republican Governor John Kasich of Ohio suffered a humiliating defeat when he tried to curb the bargaining rights of public sector unions. At the same time, Kasich and the GOP governors of Michigan and New Mexico, Rick Snyder and Susana Martinez, strength-ened their approval rates by expanding Medicaid, as made possible by Obamacare and as fiercely opposed by the faithful in the Republican Party. Even Libertarians don’t want to give up a certain degree of welfare state.

If we agree that the current crisis is a transatlantic one and that it is best solved in a transatlantic context, there are at least two things to be done.

First, remove all unnecessary hurdles to transatlantic trust. This means first and foremost, defuse the NSA bomb, and solve the spying problem. It was extremely unwise of President Obama not acknowledge the fallout from the discovery of the NSA’s tapping of Angela Merkel’s cell phone more prominently. The Obama administration should apologize for the extent of its spying activities, not only to the Germans but to all European nations. And Europe and the United States should find a compromise regarding the limits of spying on each other and coopera-tion in the collection of intelligence.

Second, complete a transatlantic free trade zone and sell the project to an increasingly skeptical public. The Trans-atlantic Trade and Investment Partnership (TTIP) is a very ambitious endeavor. The new partnership, hopefully completed within a short time frame, will not only remove tariffs, but more importantly, it will set common standards, and create growth and new jobs. Even more significant than tariffs, investment rules, and industrial standards are the politics and the psychology of TTIP. If successful, TTIP can give “the West” a new purpose and a sense of mutual understanding.

At the core of the current crisis is

a lack of consensus about what

citizens expect from government

and what they are prepared to

give to their governments.

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So far, TTIP has been more or less ignored in the U.S. political debate. There are protests against new free trade agreements, but they are mainly directed against the Trans Pacific Partnership (TPP), and not its transatlantic equivalent. Obviously, for U.S. anti-globalists TTIP is too irrelevant to bother. In Europe, however, TTIP is already causing fierce opposition, mostly from leftist or anti-globalist groups. Some of the fears are shared by a majority of voters, particularly in France, but also in Germany. Will the French movie industry lose its protection against Holly-wood? Will we have to eat “hormone beef ”? Do we have to accept food that contains GMOs? Or will there be “secret courts” that circumvent regular courts and exclusively serve the interests of foreign investors? Fear and conspiracy theories can only be countered by transparency.

Last but not least, there is still a debate about whether Europeans should punish the United States for its spying by putting the whole TTIP project on hold. Hopefully Euro-peans, and particularly Germans, realize that by punishing the United States, they would punish themselves. But that is not guaranteed, considering the state of transatlantic relations today.

About the Author

Nikolaus Piper is the New York correspondent of Süddeutsche Zeitung. His most recent book, on the financial crisis, Die Grosse Rezession – Amerika und die Zukunft der Weltwirtschaft, won the prestigious German book award “Business Book of The Year.”

About GMF

The German Marshall Fund of the United States (GMF) strengthens transatlantic cooperation on regional, national, and global challenges and opportunities in the spirit of the Marshall Plan. GMF does this by supporting individuals and institutions working in the transatlantic sphere, by convening leaders and members of the policy and business communities, by contributing research and analysis on transatlantic topics, and by providing exchange opportunities to foster renewed commitment to the transatlantic relationship. In addition, GMF supports a number of initiatives to strengthen democracies. Founded in 1972 as a non-partisan, non-profit organization through a gift from Germany as a permanent memorial to Marshall Plan assistance, GMF maintains a strong presence on both sides of the Atlantic. In addition to its headquarters in Washington, DC, GMF has offices in Berlin, Paris, Brussels, Belgrade, Ankara, Bucharest, Warsaw, and Tunis. GMF also has smaller representations in Bratislava, Turin, and Stockholm.