Sense on Cents

“People in glass houses should not throw stones.”

On the outset of the G-20 to be held in Toronto, Tim Geithner and Larry Summers served up a pile of platitudes yesterday by writing in The Wall Street Journal, Our Agenda for the G-20. Meanwhile, they have their henchman George Soros pull out the bazooka and take direct aim at Germany today in writing in the Financial Times, Germany Must Reflect on the Unthinkable.

In reviewing Soros’ commentary, it is plainly evident that my Irish Catholic heritage does not hold the patent on laying the heavy guilt trip. Soros writes:

Germany used to be at the heart of European integration. Its statesmen used to assert that Germany had no independent foreign policy, only a European policy. After the fall of the Berlin Wall, its leaders realised that German reunification was possible only in the context of a united Europe, and they were willing to make some sacrifices to secure European acceptance. Germans would contribute a little more and take a little less than others, thereby facilitating agreement.

Those days are over. The euro is in crisis, and Germany is the main protagonist.

It was only this year, when financial markets started to worry about the accumulation of sovereign debt, that interest-rate differentials began to widen. Greece became the centre of attention when its new government revealed that its predecessors had lied about the size of the 2009 budget deficit.

European authorities were slow to react, because eurozone members held radically different views. France and other countries were willing to show solidarity, but Germany, traumatised twice in the 20th century by runaway prices, was allergic to any build-up of inflationary pressures. (Indeed, when Germany agreed to adopt the euro, it insisted on strong safeguards to maintain the new currency’ s value, and its constitutional court has reaffirmed the Maastricht treaty’s prohibition of bail-outs.)

While it is convenient and politically palatable for Soros to hammer the Germans, he provides little substance and less appreciation for the German experience of the 1930s. To shower a healthy dose of sense on cents on Mr. Soros and his friends in Washington, let’s review a Financial Times commentary written by Germany’s Federal Minister of Finance, Wolfgang Schauble. He writes,  Maligned Germany Is Right to Cut Spending:

To the question of what caused the recent turmoil in the eurozone, there is one simple answer: excessive budget deficits in many European countries.

It comes therefore as a surprise, to me at least, that one of the most passionately debated economic issues of the day should be whether Germany is acting prematurely in reining in its deficit and thereby choking the rebound at home and in our neighbours’ markets. My response is an emphatic no.

Behind the calls for us to pursue a more expansionary fiscal course lie two different approaches to economic policymaking on each side of the Atlantic. While US policymakers like to focus on short-term corrective measures, we take the longer view and are, therefore, more preoccupied with the implications of excessive deficits and the dangers of high inflation.

There you go. Heavy guilt from Soros juxtaposed against heavy reality from Schauble. I particularly appreciate Schauble’s focus on the American short term mentality. I wholeheartedly agree.

Living beyond one’s means and spending money one does not have is a path to long term economic pain. Will America and Washington ever learn the lesson? Perhaps we should heed the caution sent our way from Schauble.

Until then, we may want to be careful about throwing stones.

LD

This entry was posted on Thursday, June 24th, 2010 at 11:07 AM and is filed under General, George Soros. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.