Germany’s Frau Nein

Merkel's focus so far seems to be regulation—plans for a Kyoto-like international accord on what she calls a "new global financial architecture." Behind the scenes, she has worked hard to help bring China, India and other powerful newcomers into the global concert of economic powers. While this would be a vital prerequisite for any future multilateral order, it's not clear what this does to help with the crisis now, nor is it clear how any such accord would avoid the usual problem of regulation: that it deals with yesterday's problem, but does little to address the problems of tomorrow. The Germans, for example, have been obsessed with hedge funds, which have not played a central role in the crisis.

There is another part of the picture where the Germans might play a role. Merkel has rightly noted the global imbalances that helped bring about today's problems, usually referring to the vast U.S. trade deficit and its overspending, overindebted consumers. But Germany, along with China, is the chief beneficiary of the global boom in consumption and investment, yet its own population's consumption has been anemic for a decade. Now that U.S. consumers are cutting back their spending and paying off their debt, the slack in demand can only be picked up if consumers in places like Germany start buying. Policies that shift spending power to German and other surplus countries' consumers, such as tax cuts, might be one part of the rebalancing of the post-crisis global economy.

Merkel's course is entirely understandable. With an election in September, a big tax cut or spending boost now would ruin her administration's proudest (and, her critics say, only) major accomplishment: balancing Germany's budget. If she cuts taxes now, she and Steinbrück risk looking ineffectual once the predicted rise in unemployment hits early next year, well before the election. Any additional stimulus passed now also risks disappearing in voters' minds—especially once Barack Obama's planned $700 billion spending spree, which dwarfs anything the Europeans are discussing, hits the German tabloids.

What's more, her steady-handed, no-panic course is popular with German voters and her approval ratings remain the highest of any major Western leader. Neither the Social Democrats nor the Left Party—whose leader, Oskar Lafontaine, is Germany's loudest advocate of deficit spending—have made any gains from a crisis that should be vindicating their critique of capitalism. That also shows that, to German voters at least, Merkel must be doing something right.

Still there remains the leadership question. In a global crisis of capitalism that ought to be, in the minds of many European leaders, a golden age for the continent's less market-driven, more social-democratic model, Europe once again seems to be fighting with itself. Germany, by its sheer economic heft and role as the world's biggest trading power, seems best placed to help unify in this crisis. Like few other major powers, it has an existential stake in the health of the global economy, stable financial systems, and open, liberal markets. So far, there is little indication that Germany is ready to lead—even as it drives for a more measured, less hectic response to the crisis. "No one—not Merkel, not Steinbrück, not [Foreign Minister Frank-Walter] Steinmeier—is going out and saying, this is what we should do, as one might expect in a crisis," says Jan Techau, political analyst at the German Council on Foreign Relations.

In part, that mat be because in the current mood it's difficult if not impossible for politicians to fight against the tremendous pressures to deliver what Steinbrück mockingly calls the "Great Rescue Plan," or the similar pressures within their own parties to open the public spigots with little regard to effect or cost. Perhaps a steady, conservative incrementalism—as Steinbrück says, a moderating voice amid the chaotic daily barrage of crisis plans—is the best and most useful thing that Germany has to offer.

© 2008