Challenges and Opportunities in Times of Economic Turmoil
Prepared remarks presented at a meeting hosted by the Peterson Institute for International Economics and the Hanns Seidel Foundation and the Representative of German Industry and Trade
It is a great pleasure and honor for me to have this opportunity to address you here at the Peterson Institute-which according to the latest ranking is the "Top Think Tank in the World". I thank our host, who has given us all this occasion to meet with one another.
My thanks also go to Mr. Welschke, the Representative of German Industry and Trade, and Mr. Gartzke, the representative of the Hanns Seidel Foundation. Your generous contributions have made today's meeting possible.
A bright brain in Washington recently had this to say about the economic upheaval: "With crisis comes enormous fluidity in the system, … and the transition from the inconceivable to the inevitable can be rapid." In a small way, this sentence even applies to me personally.
Certainly in terms of speed, the way my career has developed in the last few months has not coincided with my expectations. I'm not sure if "job rotation" is the right description. But certainly in my case the German labor market has proved remarkably flexible!
Ladies and gentlemen, it is good to be back, it is good to be among friends. And together, as friends, we are facing extraordinary economic challenges.
Rarely, probably never since 1945, were these challenges-global challenges-more daunting than today. The world economy is in a critical state. Confidence in financial markets is damaged. All major industrial nations are simultaneously in recession.
The only way for us to overcome this is by acting together. That's why the decisions taken during the G-20 meeting last November here in Washington are so crucial:
- continue efforts to stabilize the financial system,
- recognize the importance of monetary support,
- use fiscal measures to stimulate domestic demand, and
- refrain from raising new barriers to investment or trade.
Here in Washington I am being asked: How does Germany react to the crisis? My answer is: swiftly, resolutely, and with a sense of proportion.
Our "Pact for Employment and Stability," which we launched just a few weeks back, totals more than $65 billion. In total, all of our measures, including the automatic macroeconomic stabilizers, are providing a fiscal stimulus of about $130 billion-or 4 percent of Germany's GDP. Therefore I think it is fair to say that Germany is indeed contributing significantly to overcoming the global crisis.
I know: Not everybody in Washington would agree with this. But frankly I don't find this criticism justified. It is quite clear that we will not achieve the greatest success if each partner tries to do exactly the same as all the others, for example in terms of timing, scope, and content. The situation is different in each country, and so the responses have to be different too.
It is important for every country to pull in the same direction. And that is indeed what is happening. And the same goes for both the United States and Germany: The philosophy of our program is to strengthen both aggregate demand and long-term growth prospects at the same time.
Accordingly, most of the money is dedicated to
- additional public investment in growth-promoting infrastructure,
- education and training, and
- to financing cuts in taxes and welfare contributions.
We have also put in place a $130 billion framework for loan guarantees. This should help us to stabilize lending from banks to businesses and to avoid a credit crunch. It will help fundamentally sound and profitable firms to weather the crisis. Germany is thus making a significant contribution towards overcoming the global crisis-as was recently confirmed by the International Monetary Fund. The size of our stimulus package is thus clearly greater than the average of the G-20 countries.
In the short run, our measures will inevitably raise the fiscal deficit. This is creating challenges for us on both sides of the Atlantic. That's why we remain firmly committed to keeping Germany's public finances on a sustainable long-term path. To underscore this, we will anchor a new stringent debt containment rule in our constitution. Internationally, we have to take care that mounting public debt does not create volatility in interest and exchange rates. Therefore, other nations must also put their public finances on a sustainable footing.
In times of crisis, it is very tempting to fence off one's own economy. That is the wrong way. It only leads deeper into crisis, as is shown by painful experiences in the past. Our motto can and has to be: Keep the bazaar open! Open markets and freedom to invest are the foundations for growth and prosperity worldwide.
For decades, we have all benefited together from the global reduction in trade barriers. My country, with its steep rise to become a global economic partner, is the best example of this. And that is why Germany is pressing especially hard to ensure that all the G-20 countries stick to their promise not to set up any additional barriers to trade and investment.
The current crisis must not be used as an excuse to fall back behind the current level of trade liberalization. That is why we paid very close attention in our own stimulus program to ensure that it does not give preferential treatment to domestic suppliers. I believe that the "Buy American" clause in the US stimulus package does not adequately meet this criterion. It is true that the Act also contains a passage that mentions expressly that it does not affect international trade commitments. Which means, for example, that it would not affect EU countries.
But, surely, since the United States is a major player in global trade policy, it is only natural that it should comply with its own trade commitments. Why just restate the obvious? I fear that the "Buy American" clause could serve as a bad model for stimulus packages in other economies.
The right way forward for the continuing liberalization of trade was, is, and will continue to be the multilateral approach of the World Trade Organization (WTO). The World Bank predicts that-for the first time in more than a quarter of a century-world trade will shrink this year. That is why a successful conclusion to the Doha Round is more vital than ever. It would establish a foundation on which to rebuild the confidence of the markets. A successful conclusion of the Doha Round will generate additional global economic growth in excess of $150 billion a year.
That is why I am calling for agreement in the Doha Round before the end of this year. As I do so, I look to the United States for its support. It won't happen without it. At the April summit in London G-20 leaders should send out a strong signal for a rapid conclusion to the Doha Round.
Furthermore, the financial markets also need to find their place on the international political agenda. Regulation was inadequate here. And that led to the current crisis. So we need to act, as was also the consensus at the G-20 financial summit in Washington in November. At the meeting in London in a few days' time, nations will need to act together once again-and I am optimistic that they will find a good solution.
To see just how powerful international trade is, you need only look at both sides of the Atlantic. We can now build on this. The transatlantic market continues to be the backbone of the world economy. We now need to strengthen it. No other economic regions maintain such close and all-embracing trade and investment relations as the United States and Europe.
A few numbers might serve to illustrate the strength of our economic relations. Every year, the transatlantic economy produces goods and services worth around $4 trillion. In total, it provides a living for some 14 million people on both sides of the Atlantic. Together, the United States and the European Union create 45 percent of the world's GDP. At the same time, Europe and the United States each conduct only around 20 percent of their trade with each other. That means: At the heart of our transatlantic economic relations are the direct investments in both directions. US investment in Europe totals $1.55 trillion or 56 percent of worldwide US foreign investment.
At the same time, the United States remains the major destination for European investment abroad. Around 71 percent of all foreign direct investment in the United States comes from Europe. Tariffs do not pose barriers between the European Union and the United States any longer. So we now need to focus on the nontariff trade barriers. We want to systematically cut them back. That is the job of the Transatlantic Economic Council (TEC), which was established under the German Presidency of the European Council. It enables us to bring into line different standards and regulations-rules which have so far imposed unnecessary burdens on companies and consumers.
Together, the United States and Europe will be able to lead the world in setting global standards. The TEC issues on the table account for $10 billion. And that is why I am taking advantage of this visit to urge the new administration to join us in pressing ahead with the work of the Transatlantic Economic Council. It will enable us to further strengthen our economies on both sides of the Atlantic. A successful TEC could be of considerable help in stimulating our economies on both sides of Atlantic. A successful TEC would further strengthen economic ties that already are a model for success, and it would stimulate economic growth. And unlike with monetary and fiscal measures directed at overcoming the crisis, we wouldn't even need an exit strategy. We'd just keep reaping the benefits-both to consumers and to businesses-from lower cost of compliance with standards and regulations.
Ladies and gentlemen, at the outset, I mentioned that we have rarely faced such extraordinary challenges as we do today. And rarely has there been such a great need, such great opportunities, and such potential for successful joint action as today. Tough decisions await us, both in companies and in governments. They will affect jobs, wages, and pensions. They will affect government support for companies-how much, when, and under what conditions. Here again, what I had to say about moving from what was inconceivable to what is now inevitable holds true. Much, so very much is uncertain at present. But one thing is not: We know we will only be able to tackle the current crisis together. And we should be aware of the opportunities it contains. Sometimes, it is easier to jump the hurdles when there is a crisis. May that thought guide us as we move forward.