Currency Crisis Heightens Trans-Atlantic Tensions

Chancellor Merkel is struggling to combine financial orthodoxy with more European integration in an attempt to reassure financial markets on German terms. President Obama, meanwhile, is trying to pin the blame of US economic stagnation on her inability to do so. According to Ulrike Guérot of the European Council on Foreign Relations, the US is the country with the real economic problem, whereas the EU has more of a governance problem, “a real war of orthodoxy.” Current painful austerity measures and economic restructuring are the effects of European states’ unwillingness to overcome political division, rather than of economic necessity. 

By Charles Hawley

Spiegel Online
October 21, 2011

The US is becoming increasingly impatient with Europe's seeming inability to solve the ongoing euro crisis. Many in the United States think they know who is to blame: Germany.

For once, US President Barack Obama sounded satisfied. "Chancellor Merkel and President Sarkozy fully understand the urgency of the issues in the euro zone and are working diligently to develop a comprehensive solution that addresses the challenge," reads a White House press office statement on a Thursday video conference involving the three leaders, in addition to British Prime Minister David Cameron.

The message could, of course, be seen as one of many such White House statements issued each year expressing confidence in allies as they face difficult problems. But Thursday's statement stands in sharp contrast to the trans-Atlantic bickering that has accompanied Europe's search this autumn for a solution to its growing common currency crisis. And it obscures the truth: Many in the US think Europe -- and Germany in particular -- has taken a wrong turn.

"It's hard to detect which matters more: German behavior over Libya or its course in the management of the euro crisis," writes Ulrike Guérot of the European Council on Foreign Relations in a recent essay. "But, in short, most US analysts believe that Germany got both wrong."

As if to highlight the impression of European bumbling, the EU on Thursday announced that a second summit was to be held next Wednesday in addition to the one scheduled for Sunday. Paris and Berlin have simply been unable to agree on how best to maximize the impact of the euro backstop fund, the European Financial Stability Facility (EFSF), and need a few more days for talks.

The debate over the EFSF has been going on for months, as has a concurrent and equally rancorous discussion over how best to approach Greece's ongoing reliance on outside financial assistance. The solution, as leaders across the European Union have said in recent months, is more Europe. Greater integration, they say, is the only way to provide the kind of political framework necessary to ensure the stability of a currency like the euro.

That will take time, though. What is needed now, however, is a quick fix -- one that will reassure the markets that Europe has the problem under control.

European Dawdling

With global financial markets becoming increasingly nervous, the US has been watching closely. In September, Obama had finally had enough. In a speech in California, he said that European dawdling was "scaring the world." He added that "they're trying to take responsible actions, but those actions haven't been quite as quick as they need to be."

Berlin's response has bordered on impolitic. "It's always much easier to give advice to others than to decide for yourself. I am well prepared to give advice to the US government," said Finance Minister Wolfgang Schäuble. In an interview with the tabloid Bild am Sonntag last Sunday, Foreign Minister Guido Westerwelle said: "I can't understand some of the critical comments from our American friends regarding our policy of reducing debt."

Even Merkel herself joined in, blasting the US for its unwillingness to support an international financial transaction tax. "It can't be that countries outside the euro zone, which continuously push us to solve the debt crisis, comprehensively reject a financial transaction tax," she said. "I don't think that's okay."

The US isn't alone with its growing discomfort. Last week, Cameron told the Financial Times that European leaders should take a "big bazooka" approach to tackling the crisis. The piecemeal tactics must come to an end in order to finally resolve the future of the euro zone. "Time is short, the situation is precarious," Cameron warned.

Unusually Large Stakes

It seems likely that Europe will indeed find a way out of the current impasse by Wednesday's summit. Merkel and Sarkozy have always found last minute resolutions to similar disagreements in the past. And with financial chaos looming, the stakes are unusually large.

But, says Guérot, the debate has been instructive regarding Germany's current role in the new Europe and frustration with which the US has viewed that role. Germany is insisting on a solution to the debt crisis which does not involve positioning the European Central Bank as the funder of last resort. That means no euro bonds. And it means no banking license for the EFSF.

The debate, though, says Guérot, has gone beyond a rational discussion of the issues at hand. "If it is a carrot and sticks game, Germany is only on the sticks side," she told SPIEGEL ONLINE. "I think it has become a real war of orthodoxy. It is a real tragedy for Europe."

Both Cameron and Obama, to be sure, have clear domestic political motivations for pointing their fingers at the Continent. The British economy has once again come to a standstill after experiencing a mini-upswing, and Cameron is under pressure to soften his government's austerity measures. He benefits from the suggestion that a possible recession is not the result of Conservative policy, but of the political chaos across the English Channel.

Governance Problems

For Obama, the situation is even more dire. His re-election next year could depend on the state of the US economy. And should the euro stumble, the already stagnant US economy -- complete with stubbornly high unemployment -- is sure to take a dive too.

"If Europe does not deal with the problem of undercapitalized banks, it could easily blow up and turn into another worldwide conflagration," said Obama's former chief economic advisor Austan Goolsbee in a recent interview with SPIEGEL. "Europe as a whole has certainly been too hesitant. Germany is part of the leadership in the euro area -- and it has not yet stepped up and done what has got to be done."

The message from Guérot is similar. Adjusting European structures to where they need to be to ensure the euro's success will not be easy, she says. "The US has real economic problems," she says. "The EU has governance problems."