US ECONOMIST ADAM POSEN

'Merkel Does Not Get Basic Economics'

For weeks, Berlin has been insisting that no further economic stimulus packages are needed. Leading US economist Adam Posen told SPIEGEL ONLINE that Merkel's approach is a mistake. Yet he is also critical of Obama's strategy.

SPIEGEL ONLINE: Former British Prime Minister Margaret Thatcher famously declared at EU summits: "I want my money back." Can we expect a similar performance by German Chancellor Angela Merkel at the G-20 summit in London? Will she tell US President Barack Obama and other world leaders that she does not want to spend more of her money on economic stimulus, as she insisted over the past few weeks?

DPA

German Chancellor Angela Merkel has taken a lot of heat for her government's reaction to the economic crisis.

Adam Posen: It won't be as dramatic. Angela Merkel is a better diplomat than Thatcher. Sure, there will be a tough lady coming to London. But Merkel has lined up broad support for her position. Many other European nations agree with her take on stimulus spending. In fact, I believe the Americans will end up being more isolated at the summit on that matter than the German chancellor.

SPIEGEL ONLINE: Many American economists criticize the German position. One can hear in debates in Washington that the Germans "simply don't get it" when it comes to answers to the current global financial crisis. What does a leader like Merkel not "get"?

Posen: She does not get basic economics. She does not get that stimulus spending works in the short term. She does not get how seriously the current crisis will affect Europe and particularly Germany in the very near future. She does not get the urgent need for a global stimulus effort to increase global demand.

SPIEGEL ONLINE: But if you look at the numbers, the trans-Atlantic gap in stimulus spending is not as stark as the Americans claim. After all, the Europeans can rely on so-called "automatic stabilizers" -- a more extensive welfare state that stabilizes private demand. Also, why should they invest as much in infrastructure as the Americans do now? Most of the European infrastructure is much more developed.

Posen: These points are not wrong, of course. Such stabilizers help in a crisis. However, they do not make up for the current decline in global demand. The crisis rather tells us that these automatic stabilizers -- and hence the welfare state -- are too small in such a situation, even in Europe. Right now, we simply need to spend more public money on both sides of the Atlantic. Therefore, these counter-arguments miss the larger picture.

SPIEGEL ONLINE: Why are the Americans so focused on the German spending? Berlin is spending more than other big European nations like France, and Germany is just one country among many on the Continent.

Posen: But the Germans have tremendous leverage to influence the actions of other European nations. They are the biggest economy in Europe and the biggest net payer within the European Union. They have the ability to convince other countries to follow their advice and shy away from too much public spending. That is happening right now and I don't blame the German government for it -- if you are the Pope you want everybody to be Catholic, right? In a way, I even welcome that the Germans are showing leadership, we have often criticized their reluctance to take the initiative. It is just unfortunate that the Germans are currently leading in exactly the wrong direction. They also isolate other nations like Great Britain that are willing to spend more on the stimulus -- by highlighting that they will amass massive budget deficits in the process and other European nations won't.

SPIEGEL ONLINE: So if the German position is so influential, will Obama leave the G-20 summit empty-handed?

Posen: He won't leave empty-handed. There will be some form of agreement at the summit, for instance on the reform of the International Monetary Fund (IMF). But I think that the debate on more European stimulus spending is largely written off by the White House. They are not expecting any major commitments in London.

SPIEGEL ONLINE: One of the reasons why the Europeans are reluctant to spend more is a lack of confidence in the prospects of massive public spending. You have been very critical of some of Obama's efforts, too. Does his team have a way out of the crisis?

Posen: I am very happy how aggressive the Obama White House has been on the stimulus spending. But I am also very critical of their bank rescue plan just presented by Treasury Secretary Timothy Geithner. First, I think it is a massive transfer of public money towards private investors who have caused the crisis in the first place. While the taxpayers basically have to vouch for all the risks, hedge funds and other private investors could make a bonanza under the rules of the plan by buying up assets from ailing banks for very low prices. Also, the plan will buy up only some of the toxic assets. Members of the administration assure me that I don't know the details of their plan, that the 'stress tests' on the banks involved will be really tough, etc. But I heard similar assurances when I followed the Japanese reaction to their banking crisis in the 1990s. Yes, I am very critical of Obama's plan for the banking system. It might work, I think it is just not likely.

Interview conducted by Gregor Peter Schmitz