Summary: Both Europe and

the United States face enor-

mous and unsolved long-term
economic and fnancial prob-
lems. Both sides are convinced
that the other is doomed. In
the United States, for Repub-
licans, Europe has too much
debt, whereas for Democrats,
it does not have enough. On
the other hand, there is a
broad consensus among Euro-
peans that the decline of U.S.
power and economic might is
inevitable. If we agree that the
current crisis is a transatlantic
one and that it is best solved in
a transatlantic context, there are
at least two things to be done.
First, remove all unnecessary
hurdles to transatlantic trust.
Second, complete a transatlantic
free trade zone and sell the
project to an increasingly skep-
tical public.
Foreign Policy Program
Policy Brief
When the Music Stopped: Closing the
Transatlantic Gap in Economic Thinking
by Nikolaus Piper
1744 R Street NW
Washington, DC 20009
T 1 202 745 3950
F 1 202 265 1662
E info@gmfus.org
May 2014
It was a frst of its kind. In its semian-
nual Report to Congress on Interna-
tional Economic and Exchange Rate
Policies, released in October 2013,
the U.S. Treasury Department named
Germany as the main culprit for
economic imbalances in the world.
Not the Peoples Republic of China,
as in former reports, but the Federal
Republic, one of the United States
closest allies. Germany has main-
tained a large current account surplus
throughout the euro area fnancial
crisis,
1
the report said, and in 2012,
Germanys nominal current account
surplus was larger than that of China.
Germanys anemic pace of domestic
demand growth and dependence
on exports have hampered rebal-
ancing at a time when many other
euro-area countries have been under
severe pressure to curb demand and
compress imports in order to promote
adjustment. Te net result has been a
defationary bias for the euro area, as
well as for the world economy.
2
A defationary bias: those were
clear words. U.S. economist Paul
Krugmans routine criticism of
1 U.S. Department of the Treasury. (October 30,
2013). Report to Congress on International Economic
and Exchange Rate Policies. Washington, DC: U.S.
Government Printing Offce, 3. htp://www.treasury.gov/
resource-center/internatonal/exchange-rate-policies/Doc-
uments/2013-10-30_FULL%20FX%20REPORT_FINAL.pdf
2 Ibid.
over-saving Germans seemed to
have become the ofcial position
of the Obama administration. Such
criticism is not new. Since President
Jimmy Carter, the U.S. administration
has pressed the Germans time and
again to spend more and to pull the
world economy like a locomotive.
Obamas frst secretary of the treasury,
Timothy Geithner, travelled to Berlin
to tell Angela Merkel and Wolfgang
Schuble that Germany should play
a much more active role in solving
the euro crisis, i.e. put more money
at risk. But naming and blaming
in a Treasury report is something
altogether diferent. Te German
reaction to the October 2013 report
was one of indignation and of feeling
misunderstood. We have always
been a strong export nation,
3
said Ilse
Aigner, a rising star in the conserva-
tive Bavarian conservative party CSU,
the sister organization to Angela
Merkels CDU. And we are proud of
it.
4
In a way, it seemed that Germans
felt like a student striving to be best of
class and who now are being criti-
cized by an underperforming teacher
for being overachievers. Te German
reaction reveals a deep disappoint-
3 Heller, G., & Marsh, S. (October 31, 2013). Germany
Rejects U.S. Criticism of Export Reliance. Reuters.
htp://www.reuters.com/artcle/2013/10/31/us-germany-
usa-trade-idUSBRE99U0M920131031
4 Ibid.
Foreign Policy Program
Policy Brief
2
ment with the United States, to say the least. One can
doubt the wisdom of the economists in the Treasury; afer
all, the problems with German austerity that they were
complaining about have been mitigated in the course of
2013. But the German reaction nonetheless showed a good
helping of vanity and economic illiteracy.
All this was taking place against the background of the
NSA spying scandal that brought the approval ratings of
President Obama in Germany to a record low, placing a
severe strain on German-U.S. relations. Te love afair
between the German public and the U.S. president is
defnitively over. Tere is mistrust growing on both sides
of the Atlantic. Te gap is widening, a dynamic driven not
only by a diferent view on realities of the 21
st
century, but
also by diferent values and a diferent awareness of what
is dangerous in the world and what is not. To be sure,
the revelations of Edward Snowden are more profoundly
afecting the views of most people, at least in Germany,
than the gaps in economic thinking. But the latter are at
least as important. In the long run, the NSA scandal will
be overcome, one way or the other. But the deep divide in
economic thinking will not disappear by itself, as it repre-
sents a much more fundamental disagreement. Action is
needed.
Both Europe and the United States face enormous and
unsolved long-term economic and fnancial problems. Te
fnancial crisis and the Great Recession gave both sides
a glimpse at these problems. Most visibly is the heavy
debt burden that nearly all nations on both sides of the
Atlantic are now facing. Never before in peacetime were
industrialized nations as a group as indebted as today. But
the invisible part of these problems reaches to the core of
democratic societies: Tere is a huge disparity between
what people expect from their government and what they
are willing to pay for it.
In the transatlantic context, there is a remarkable absurdity
added. Both sides are considering the problems of indebt-
edness to be something specifc to the other side respec-
tively. Or, to put it simply, both sides are convinced that the
other is doomed. Tere is a phrase that is still resonating
from the 2012 U.S. presidential campaign. Afer winning
the New Hampshire primary in January 2012, then-
Republican candidate Mitt Romney depicted the Obama
administration as a refection of the worst of what Europe
has become.
5
Mitt Romney never told us what the worst
of Europe exactly constitutes. But he is by no means alone
in his opinion. For many conservative Americans, Europe
has become a metaphor for economic, social, and political
failure, for stagnation, bad demographics, and an overly
generous welfare state that kills all incentives to work and
innovate. In other words, Greece is the future of Europe.
Many Democrats also believe in the fall of Europe, but for
exactly the opposite reasons. As mentioned in the Treasury
report, many in the administration maintain that Germany
is hindering progress in Europe because it does not spend
enough. In short, for Republicans, Europe has too much
debt, whereas for Democrats, it does not have enough.
On the other hand, there is a broad consensus among
Europeans that the decline of U.S. power and economic
might is inevitable. Particularly intellectuals in France
and Germany are convinced that U.S. style capitalism has
no future, and that we are in need of something diferent.
Te shelves in German book stores are packed with books
about the inevitable U.S. decline. Te United States has
become a danger for world peace and the global currency
system, one German author writes. Te fact that the U.S.
Treasury is pressing Germany into spending more and
issuing more debt may add to this grim picture. And the
negative clich of the United States has been refected in
recent developments: the repeated partisan war over the
debt ceiling, the government shut-down last fall, and the
ongoing struggle about Obamacare. Is extreme partisan-
ship in Washington not a clear signal for U.S. decline? And
was the fnancial crisis, which started in the U.S. housing
market, not a clear indication of what is to come? It is the
beginning of the end of the American empire, as one lef-
wing blogger put it.
In Europe as well as in the United States, prejudice trumps
reality. Of course, neither the United States nor the EU
or Germany is doomed. For sure, formidable problems
persist, but we can solve them, provided we want to.
5 Boxer, S. (2012, January 10). Romney Hits Obama Hard, Paints Himself as Presump-
tive Nominee. CBS News. htp://www.cbsnews.com/news/romney-hits-obama-hard-
paints-himself-as-presumptve-nominee/
Never before in peacetime were
industrialized nations as a group
as indebted as today.
Foreign Policy Program
Policy Brief
3
But why is it not only important that Europeans and
Americans solve their own problems, but that they also
regain their ability to communicate to each other about
their respective problems? Ask George Kennan, the great
U.S. diplomat of the 1940s and 1950s. In his epic biography,
the Pulitzer-Prize-winner John Gaddis quotes Kennan with
some surprising remarks on transatlantic relations. It was
in 1947, just the time when the Marshall Plan for Europe
was in the making. Kennan was collecting arguments for
the United States to help Europe. Te point was not only,
wrote Kennan, to enable the Europeans to exist without
charity so that they can buy from us and have enough
self-confdence to withstand outside pressure. More funda-
mental was the traditional concept of U.S. security, which
had assumed that a Europe of free states would be subser-
vient to no great power. Ten he added something that was
not self-evident at all.
If Western Europe fell under a communist dictatorship,
Kennan wrote, the United States, in common with most of
the rest of the world, would sufer a cultural and spiritual
loss incalculable in its long term efects. Te American
people were bound to be infuenced by whether the Euro-
pean nations are doing a good job helping themselves.
George Kennans point is crucial. Without Europe, the
United States would sufer from a cultural and spiritual
loss. Tis phrase is valuable the other way round as well:
Europe is doing much better with a vibrant the United
States that lives up to its intellectual capacities. Te trans-
atlantic alliance is more than NATO; it is a partnership
to solve common problems. To be aware of this is more
important today than ever. Will this alliance still be able to
shape the economic future of the world? For too long, we
have all taken economic cooperation across the Atlantic for
granted. We should not.
How should the West deal with a neighbor that is willing to
turn the clock back to the days of the Cold War? Will the
United States and Europe, particularly Germany, be able to
act in concert and impose meaningful sanctions on Russia?
Or will the crisis cause further damage to the Western alli-
ance?
Te frst step is to realize that we have a common problem.
Over decades, the debt-to-GDP ratio in nearly all nations
on both sides of the Atlantic has been rising. Both the EU
and the United States amassed a public debt stock close
to their respective annual GDP. Te debt-to-GDP-ratio in
the EU is at 89.8 percent,
6
in the United States, it is 110.6
percent.
7
Te European numbers vary between 175.2
8

percent in Greece and 10.2
9
percent in Estonia, with the
core nations France (94.0 percent)
10
and Germany (81.1
percent)
11
closer to the upper and more problematic end of
the scale.
On the U.S. side, federal debt makes up the biggest chunk,
but the situation has improved a bit with the ongoing
recovery. At least as important, however, is the situation in
the states and municipalities. Te bankruptcy of Detroit
is a clear warning. Not all cities are as poorly managed
as the Motor City, but the underlying reasons of Detroits
downfall are found in other cities as well: soaring costs for
Medicaid, for pensions, and an eroding tax base. Bad news
is also coming from heavily indebted Puerto Rico, whose
credit rating was recently downgraded. Last year, Richard
Ravich, the banker who helped save the city of New York
from bankruptcy in 1975, and Paul Volcker co-authored
a report of what they called the State Crisis Task Force.
Surprisingly, the report received little to no attention in the
U.S. media.
Here is what Ravich and Volcker found: the retirement
funds of teachers, fre fghters, and policemen in the United
States are underfunded by no less than $1 trillion. New
York City alone has $85 billion in unfunded liabilities to its
retirees. Te underfunding of pension plans is equivalent to
6 to 18 percent of GDP, which technically should be added
to the ofcial debt-to-GDP rate of 110.6 percent. Further-
more, Medicare is underfunded by $1 trillion and while
the cost of Medicaid will rise by 8.1 percent annually until
6 Directorate General for Economic and Financial Affairs (Spring 2013), European
Economic Forecast, htp://ec.europa.eu/economy_fnance/publicatons/european_econ-
omy/2013/pdf/ee2_en.pdf
7 lbid
8 lbid
9 lbid
10 lbid
11 lbid
The transatlantic alliance is more
than NATO; it is a partnership to
solve common problems.
Foreign Policy Program
Policy Brief
4
the end of the decade,
12
the revenue side is only projected
to increase by 3.9 percent. Last year, Medicaid surpassed
primary and middle schools as the largest state expenditure
for the frst time in history.
Te United States may be a younger society than Germany
or Italy, but it is nonetheless aging. If the Congressional
Budget Ofces projections are right, the number of Social
Security benefciaries will rise from 57 million today to 76
million in 2023 and 101 million in 2038. Te problems of a
welfare state in difcult times, always thought to be exclu-
sively European, will haunt the U.S. society as well. Te
problems will come later than in Europe (where they can
already be felt), but they will hit a country less prepared to
tackle them than countries like Sweden, the Netherlands,
or Germany.
All these problems are well known. Te CBO is, afer all,
not an obscure organization. But the impact of these facts
is widely ignored in Washingtons partisan politics. Te
endless political fghting surrounding the government
shutdown, about raising the debt ceiling and avoiding the
so called fscal clif dealt with todays defcit (plus Obam-
acare), but not with the years 2023 or 2038. It is a strange
form of short-termism. Republicans press the White
House to cut deeply into the federal budget of today, but
this would endanger success in dealing with the long-term
problem.
It is a short-termism that is well-known from Europe,
and Americans have complained about it rightfully. Te
euro crisis over the course of years was a painful exercise
of elected ofcials muddling through and not daring to
tell the truth to their electorate. For the moment, the euro
crisis seems to be tamed, but with a classical short term
measure the monetary fre-hose. Mario Draghi, head of
the European Central Bank (ECB) promised to do what-
ever it takes
13
to defend the European currency. Financial
markets are as happy with this promise as they were with
quantitative easing by the Federal Reserve in Washington.
Last fall, German political parties added another example
of short-termism of a specifc Teutonic kind. In September
2013, Angela Merkel and her center-right CDU carried
12 Department of Health & Human Services, 2011 Actuarial Report on the Financial
Outlook for Medicaid, p. iv
htp://medicaid.gov/Medicaid-CHIP-Program-Informaton/By-Topics/Financing-and-Reim-
bursement/Downloads/medicaid-actuarial-report-2011.pdf
13 Reuters, July 26 2012, Draghi sends strong signal that ECB will act, htp://www.
reuters.com/artcle/2012/07/26/us-eurozone-ecb-draghi-idUSBRE86P0HM20120726
a convincing electoral victory, but it came at a price: the
chancellor lost her coalition partner, the pro-business
FDP. As a result, the CDU had to form a grand coalition
with center-lef Social Democrats (SPD). Te stunning
core of their coalition pact is the dismantling of some of
the reforms that were responsible for the latest economic
success of Germany. Starting in 2015, Germany will
introduce a national minimum wage of 8.50 euro. Most
certainly, this wage will make it more difcult for young
adults with a poor education and the long-term unem-
ployed to enter the labor market. Additionally, German
workers will receive a higher minimum social security
payment (Mindestrente) for those who only paid low
contributions during their active work life. Te idea as such
is not bad, but additional funds for the new entitlement are
supposed to come from the pension system itself. Tis in
turn means that previous savings in the system, realized by
former reforms, will be spoiled again.
Why are the coalition partners doing this? Tey are mostly
undoing reforms because the Social Democrats are scared
witless. Te SPD implemented the reforms of the German
welfare state with the so-called Agenda 2010 in 2004, only
to be punished terribly at the next election. Back then, the
party lost its governing majority and had to watch the rise
of a dangerous competitor on the far lef: the party called
Die Linke (Te Lef) is comprised of East German post
communists, West German lefists, and social democratic
defectors. As a consequence German politics moved from
a four-party to a fve-party system, which diminished
political options for the SPD. Tere are lessons from this
experience for everyone in Berlin. Long-term perspectives
dont pay of; populism fares much better.
And this brings us back to the United States. Since the
fnancial crisis, the nation has experienced a remarkable
surge of populism. Te Tea Party is deeply rooted in many
The euro crisis over the course
of years was a painful exercise of
elected offcials muddling through
and not daring to tell the truth to
their electorate.
Foreign Policy Program
Policy Brief
5
U.S. political traditions. Out of a deeply felt discontent with
the course of the country, thousands rallied behind ferce
anti-government slogans, that have, at least for European
ears, a grotesque undertone. Uncontested in this respect
is the slogan that was shown at a Tea Party Rally in 2009
in upstate New York: Cut Taxes, Not Defense! It is an
absurdity that is difcult to beat. Meanwhile there is also
a new brand of lef-wing populism linked to politicians
like Senator Elisabeth Warren (D-MA) or, even more
important, Bill de Blasio, the new mayor of New York City.
He carried a landslide victory because a majority of New
Yorkers felt a deep discontent with the state of the city.
Te extreme short-termism on both sides of the Atlantic
is an indication of how similar the problems are that both
sides are facing. At the core of the current crisis is a lack
of consensus about what citizens expect from government
and what they are prepared to give to their governments.
Tat is true in stagnant and cynic France, but it is also true
in Germany. Te most important issue for many Germans
is not how to create growth or jobs, but Steuergerechtig-
keit, or tax fairness. Tax the other guys.
Americans historically relied less on government than
Europeans, but the diference is smaller than one would
expect. Last year, the U.S. public expenditure quota, or the
share government takes from the U.S. economy, was at 42.2
percent. Germanys is 45.0 percent.
14
Tere is no question
that government played a decisive role in transforming the
United States into the greatest nation on earth. It started
with land grants and continued with public schools, the
Interstate highway system, the conquest of the moon, and a
U.S. military that today is second to none. Troughout U.S.
history, the size of government was always contested, but in
todays Washington, conservatives and liberals cannot even
14 The Heritage Foundation and The Wall Street Journal, 2014 Index of Economic Free-
dom htp://www.heritage.org/index/country/germany
agree on the facts they are battling about. Terefore, today
we are witnessing one of the least productive Congresses in
history, the sequester, the endless fghting about Obam-
acare, etc. As Te Economist famously put it, Republicans
moved to the unthinking right, Democrats moved to the
unreformed lef.
Te Tea Party may have energized the GOP, but when
it comes to day-to-day politics and the practical conse-
quences of lean government, the base for radical libertari-
anism is eroding quickly. Te Republican Governor John
Kasich of Ohio sufered a humiliating defeat when he tried
to curb the bargaining rights of public sector unions. At the
same time, Kasich and the GOP governors of Michigan and
New Mexico, Rick Snyder and Susana Martinez, strength-
ened their approval rates by expanding Medicaid, as made
possible by Obamacare and as fercely opposed by the
faithful in the Republican Party. Even Libertarians dont
want to give up a certain degree of welfare state.
If we agree that the current crisis is a transatlantic one and
that it is best solved in a transatlantic context, there are at
least two things to be done.
First, remove all unnecessary hurdles to transatlantic trust.
Tis means frst and foremost, defuse the NSA bomb,
and solve the spying problem. It was extremely unwise
of President Obama not acknowledge the fallout from
the discovery of the NSAs tapping of Angela Merkels cell
phone more prominently. Te Obama administration
should apologize for the extent of its spying activities, not
only to the Germans but to all European nations. And
Europe and the United States should fnd a compromise
regarding the limits of spying on each other and coopera-
tion in the collection of intelligence.
Second, complete a transatlantic free trade zone and sell
the project to an increasingly skeptical public. Te Trans-
atlantic Trade and Investment Partnership (TTIP) is a
very ambitious endeavor. Te new partnership, hopefully
completed within a short time frame, will not only remove
tarifs, but more importantly, it will set common standards,
and create growth and new jobs. Even more signifcant
than tarifs, investment rules, and industrial standards are
the politics and the psychology of TTIP. If successful, TTIP
can give the West a new purpose and a sense of mutual
understanding.
At the core of the current crisis is
a lack of consensus about what
citizens expect from government
and what they are prepared to
give to their governments.
Foreign Policy Program
Policy Brief
6
So far, TTIP has been more or less ignored in the U.S.
political debate. Tere are protests against new free trade
agreements, but they are mainly directed against the
Trans Pacifc Partnership (TPP), and not its transatlantic
equivalent. Obviously, for U.S. anti-globalists TTIP is too
irrelevant to bother. In Europe, however, TTIP is already
causing ferce opposition, mostly from lefist or anti-
globalist groups. Some of the fears are shared by a majority
of voters, particularly in France, but also in Germany. Will
the French movie industry lose its protection against Holly-
wood? Will we have to eat hormone beef ? Do we have to
accept food that contains GMOs? Or will there be secret
courts that circumvent regular courts and exclusively
serve the interests of foreign investors? Fear and conspiracy
theories can only be countered by transparency.
Last but not least, there is still a debate about whether
Europeans should punish the United States for its spying by
putting the whole TTIP project on hold. Hopefully Euro-
peans, and particularly Germans, realize that by punishing
the United States, they would punish themselves. But that
is not guaranteed, considering the state of transatlantic
relations today.
About the Author
Nikolaus Piper is the New York correspondent of Sddeutsche
Zeitung. His most recent book, on the fnancial crisis, Die Grosse
Rezession Amerika und die Zukunf der Weltwirtschaf, won the
prestigious German book award Business Book of Te Year.
About GMF
Te German Marshall Fund of the United States (GMF) strengthens
transatlantic cooperation on regional, national, and global challenges
and opportunities in the spirit of the Marshall Plan. GMF does this by
supporting individuals and institutions working in the transatlantic
sphere, by convening leaders and members of the policy and business
communities, by contributing research and analysis on transatlantic
topics, and by providing exchange opportunities to foster renewed
commitment to the transatlantic relationship. In addition, GMF
supports a number of initiatives to strengthen democracies. Founded
in 1972 as a non-partisan, non-proft organization through a gif
from Germany as a permanent memorial to Marshall Plan assistance,
GMF maintains a strong presence on both sides of the Atlantic. In
addition to its headquarters in Washington, DC, GMF has ofces
in Berlin, Paris, Brussels, Belgrade, Ankara, Bucharest, Warsaw, and
Tunis. GMF also has smaller representations in Bratislava, Turin, and
Stockholm.