‘It Doesn’t Exist!’

Since markets took a turn for the worse in September, there has been a chorus of calls for a Pan-European response. Most of those proposals have been vetoed by a group of countries led by Germany, the European Union's biggest economy and leading paymaster, on whose back many of these costs would fall. Leading the German defense has been Peer Steinbrück, the Social Democratic finance minister in Chancellor Angela Merkel's cabinet. Speaking with NEWSWEEK's Stefan Theil at the Finance Ministry in Berlin, Steinbrück explains why he doesn't like any of the proposals he's seen.

Theil: You're facing a lot of criticism inside and outside Germany, particularly from France and the EU Commission, that you should do more to fight the crisis.
Steinbrück: We have a bidding war where everyone in politics believes they have to top up every spending program that's been put to discussion. I say we should be honest to our citizens. Policies can take some of the sharpness out of it, but no matter how much any government does, the recession we are in now is unavoidable. When I look at the chaotic and volatile debate right now, both in Germany and around the world, my impression and concern is that the daily barrage of proposals and political statements is making markets and consumers even more nervous. Still, Brussels is pressing for a joint European approach. For a while the position in Brussels and a few other places has been "We're now very much for setting up large-scale spending programs, but we're not really going to ask what the exact effects of those might be. And since the amounts are so high, well, let's get the Germans to pay because they can." Ms. Merkel and I are trying to calm them down a bit just now, and understandably that's getting us criticized.

What is wrong with the stimulus proposals?
The speed at which proposals are put together under pressure that don't even pass an economic test is breathtaking and depressing. Our British friends are now cutting their value-added tax. We have no idea how much of that stores will pass on to customers. Are you really going to buy a DVD player because it now costs £39.10 instead of £39.90? All this will do is raise Britain's debt to a level that will take a whole generation to work off. The same people who would never touch deficit spending are now tossing around billions. The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking. When I ask about the origins of the crisis, economists I respect tell me it is the credit-financed growth of recent years and decades. Isn't this the same mistake everyone is suddenly making again, under all the public pressure?

Doesn't an unprecedented crisis call for unprecedented measures?
It's the yearning for the Great Rescue Plan. It doesn't exist. It doesn't exist! Dealing with an unprecedented crisis is a puzzle, a trial-and-error. Honestly, I don't know. I tend to be skeptical because it is human nature to see the crisis as even worse than it is. I don't want to downplay anything; 2009 looks like it will be a very difficult year. But we are not about to collapse. We are just about to ratify our €31 billion stimulus in Parliament. As long as we haven't even given that a chance to work, I am not going to participate in this bidding war over who can do the most. I try to exude a little steadiness and continuity instead.

What entails the greater risk to the economy: not acting now before the pain gets worse or the negative consequences of overspending now?
I don't think anyone knows. Making political decisions means taking responsibility in an environment of uncertainty. When in doubt, I'd say the risk is greater of burning money without significant effects and in the end having a budget weighed down with even more debt. For me the only stimulus measures that make sense are those that create jobs and have a positive structural effect beyond the economic cycle. One should wait to see how what we have agreed on now works before one thinks about readjusting.

How will the crisis redistribute global power? Surely Frankfurt won't replace New York or London as a financial capital just because Germany's banking system looks relatively stable.
I don't expect any immediate, visible shifts. But when we look back in 2018, we will see that the world has become more multipolar, more heterogeneous. The U.S. is exceedingly dynamic, has tremendous flexibility, mobility and energy, and has so far come out of every economic hole faster than we in Old Europe. There is no reason they shouldn't come out of the current situation faster, too. America will continue to play a dominant role, but there will be others who also have a role, in Asia obviously. Europe will have to search for and find its future role. The financial summit in Washington was a symbol. Do you really think that you're going to get these debates from a G20 format back down to the G7? I'm rather skeptical.

The economic crisis shows once again that Europe has a leadership problem.
Europe is difficult to coordinate, and our main deficit may not even lie in this area of finance and economics, but in foreign and security policy. We have a leadership problem because we are still 27 different members who have still not decided on how to work with each other based on what we used to call a European constitution.

As Europe's biggest economy and the world's leading exporter, wouldn't it be in Germany's interest to take more of a leadership role in this economic crisis?
I'm ambivalent about leadership. That Germany makes its contribution, that our capabilities are neither underestimated nor overestimated, I can live with that.

© 2008