DRAFT by wuyunqing


									DRAFT                                                                                                          3 March 2011

Narcissism of Minor Differences or Major Economic Rifts?
Determinants of Transatlantic Economic Relations
Stormy-Annika Mildner and Daniela Schwarzer1

    Key Words
    Transatlantic relations, financial and economic crisis management, financial regulatory reform, global
    macroeconomic imbalances, non-tariff barriers to trade.

    No transcontinental partnership worldwide is more deeply integrated than the transatlantic econo-
    my. The United States and the European Union not only conduct roughly 20 percent of their trade in
    goods with each other, they are even more deeply integrated when it comes to investment: Approx-
    imately 50 percent of U.S. foreign direct investment (FDI) abroad (stocks, figures for 2008) is located
    in the EU; the EU accounts for 63 percent of U.S. inward FDI stocks. The transatlantic partnership
    rests on a solid foundation, including broadly common interests and ideologies in the economic and
    political spheres as well as a general overarching consensus about the structure of the international
    economic architecture. Nevertheless, the last years have shown remarkable differences on wide range
    of issues: trade imbalance targets, bank and transaction fees, and growth strategies to name just a
    few. In this paper we explore the divers of convergence and divergence, cooperation and conflict.
    We start out with an analysis of the state of transatlantic economic relations. We then present four
    short case studies to gain a better understanding of the glue and centrifugal powers in the transatlan-
    tic economy: immediate crisis management (fiscal policy: spending versus balancing the budget),
    macroeconomic imbalances (trade imbalance targets), financial regulation (bank levy), and transatlan-
    tic integration. After highlighting the key similarities and differences of the respective policy ap-
    proaches we discuss possible root causes which can be economic and financial realities, perceptions
    and historical experience, ideas and ideologies, institutional and structural constraints – as well as
    obviously politics.

                                                             “Commentators on both sides of the Atlantic sometimes harp
                                                             on alleged policy differences between the United States and
                                                             our colleagues in Europe. This is not the reality. The last two
                                                             years have witnessed intense and productive policy coordina-
                                                             tion and cooperation between Europe and the United States.”
                                                             Assistant Secretary Charles Collyns (January 2011)2

                                                             “I think we should do much more together. We have condi-
                                                             tions like we have never had before and it would be a pity if
                                                             we missed the opportunity.”
                                                             President of the European Commission, Manuel Barroso (July 2010)3

1 Stormy-Annika Mildner is Senior Fellow in the Directing Staff of the German Institute for International and Security Affairs
(SWP); Daniela Schwarzer heads the Research Unit European Integration at SWP.
2 Remarks by Assistant Secretary Charles Collyns on ‘The Transatlantic Relationship and the G20’, 20 January 2011,


Introduction: Drivers of Convergence and Divergence
Trade imbalance targets, bank and transaction fees, growth strategies, non-tariff barriers in trade
– the list of conflictual issues within transatlantic economic relations is long. While the transatlan-
tic partnership still rests on a solid foundation, including broadly common interests and ideolo-
gies in the economic and political spheres as well as a general overarching consensus about the
structure of the international economic architecture, the management of the financial and eco-
nomic crisis unveiled many divergent views between the transatlantic partners. In 2009, the U.S.
administration repeatedly criticized the Germans for their relatively cautious fiscal programs and
for German Chancellor Angela Merkel’s refusal to support a common European fund to bail out
banks as well as a joint EU stimulus. The U.S. call for more spending was met with little sympa-
thy by German decision-makers, who – much earlier than their U.S. counterparts – focused on
exit strategies, pushing for a swift phase-out of fiscal stimulus programs in the run-up of the G20
meetings in 2010. Equally contentious as growth strategies (spending versus fiscal discipline) is
the issue of global macroeconomic rebalancing– at least between some EU member states and
the US. Treasury Secretary Timothy Geithner’s proposed to set concrete targets for trade sur-
pluses and deficits. While France in a first reaction welcomed the approach, it was rebuffed by
Chancellor Merkel: “To set political limits on trade surpluses and deficits is neither economically
justified nor politically appropriate”.4 Just as the U.S. proposal on trade balance targets was met
with little understanding in Germany, the Franco-German proposal on a global financial transac-
tion tax raised eyebrows in the United States. “A day-by-day financial transaction tax is not some-
thing we are prepared to support,” Treasury Secretary Geithner emphasized.5 Meanwhile, transat-
lantic economic integration stalled, with little to no progress under the Transatlantic Economic
Council. Barack Obama’s decision, not to attend the EU-U.S. Summit, which was planned to take
place in Spain in May 2010, further fuelled worries about a new transatlantic rift. Many observers
who had hoped for a renewal of the Atlantic alliance under the new American President quickly
became disillusioned.
In his 2009 book “The Narcissism of Minor Differences: How America and Europe are Alike”,
Peter Baldwin analyzed how deep and wide the differences between the United States and Eu-
rope, in his words the “hissing cousins”, actually are, finding that the two continents really are
much more alike than overexcited media coverage often imply. In particular for other countries,
the differences between Europe and the United States appear invisible and inconsequential.
Baldwin argued that foreign policy under the Bush administration had so poisoned relations be-
tween the transatlantic partners that it affected more general perceptions of what differences di-
vide the North Atlantic: “Vast cauldrons of rhetorical soup have been boiled from meager scraps
of evidence.”6 Often forgotten are the many commonalities within the transatlantic partnership
and the high level of trade and investment flows. Along these lines, Assistant Secretary Charles
Collyns emphasized earlier this year: “Where we have disagreed, the differences have largely been

3 Quoted in “EU-U.S. Ties not Living up to Potential: Barroso,” in: Reuters, 15 July 2010,

4 Quoted in: Patrice Hill, “Germany Rebuffs Obama on Trade Gap,” in: Washington Times, 11.11.2010.
5 Quoted in: Emma Ross-Thomas/Simon Kennedy, “Brown Split on Tobin Tax at G-20 Meeting,” in: Bloomberg, 8.11.2009.
6 Peter Baldwin, The Narcissism of Minor Differences: How America and Europe are Alike, Oxford 2009, p. 11.

in emphasis and tactics rather than in goals or strategic direction. The Transatlantic Relationship
remains healthy and robust.”7
In our paper we ask whether the current confrontations are just that: a result of small narcissistic
differences or a deeper-running transatlantic rift. To answer this question, we first take a closer
look at the state of the transatlantic economy in search of common economic interests. The size
of the transatlantic economy together with the high degree of integration underlines the impor-
tance of the transatlantic partners to each other. It does not explain, however, diverging views on
many contentious issues. As cooperation and confrontation is always determined by a potpourri
of different factors, we briefly analyze four case studies in the second part of our paper to gain a
better understanding of the glue and centrifugal powers in the transatlantic economy: immediate
crisis management (fiscal policy: spending versus balancing the budget), macroeconomic imbal-
ances (trade imbalance targets), financial regulation (bank levy), and transatlantic integration. In
their article “From Convoy to parting Ways”, Pisany-Ferry/Posen (2010) provide an excellent
framework for this analysis, identifying the following explanatory factors: economic and financial
realities, perceptions and historical experience, ideas and ideologies, institutional and structural
constraints, and politics (such as election cycles).8
Before we start with our discussion, a caveat has to be pointed out: The EU is anything but a
monolithic bloc in the policy areas which we discuss. Interests and ideas among EU member
states sometimes vary just as much as between the transatlantic partners. This makes a compari-
son anything but easy. The picture is even more complicated as in some of the issue areas studied,
the US will interact with the EU as its partner (e.g. case study IV on transatlantic integration),
while in other cases (e.g the case studies on fiscal policies in crisis management or coping with
imbalances in the G20) the member states are still the key actors. Given these complexities, we
briefly present the EU position, if there is one, and in addition highlight member state’s perspec-
tives if they are relevant in terms of bilateral relationships with the EU or in determining the Eu-
ropean position.

Transatlantic Economic Relations: What Holds Us Together
The following figures underline the common interests of the transatlantic partners. The com-
bined economic weight of the U.S. and the EU means that how the transatlantic partners manage
issues such as regulations and standard-setting, foreign investment or competition policy influ-
ences economic policy-making around the world on these matters.9 Together, the U.S. and the
EU account for approximately 42 percent of worldwide GDP, 28 percent of worldwide exports,
34 percent of global imports, and 70 percent of outward stock of foreign direct investment (FDI)
(see Figure 1).

7 Remarks by Assistant Secretary Charles Collyns on ‘The Transatlantic Relationship and the G20’, 20 January
8 Jean Pisani-Ferry/Adam Posen, From Convoy to parting Ways? Post-crisis Divergence between European and U.S. Macroeconomic Policies,

Conference Draft, Washington D.C. 9 October 2010, p. 3.
9 R. J. Ahearn/ J. W. Fisher/ C. B. Goldfarb/ C.E. Hanrahan/ W.E. Eubanks/ J. E. Rubin, European Union – U.S. Trade and In-

vestment Relations: Key Issues, Congressional Research Service, CRS Report to Congress RL34381, Washington D.C., 2008; Henning
Meyer/ Stephen Barber, Making Transatlantic Economic Relations Work, Global Policy Volume 2, Nr. 1, January

Figure 1: The Transatlantic Economy, 2009

Sources: IMF, UNCTAD, figures for 2009
*Based on PPP estimates, ** Total does not include Intra-EU27

As Hamilton/Quinlan (2010) emphasize, few partnerships worldwide match the transatlantic
economy. The U.S. and the EU conduct roughly 20 percent of their trade in goods with each
other (see Figure 1), with this figure being even higher when it comes to the service sector. In
2009, the U.S. was the EU’s most important trading partner (19 percent of total merchandise
exports). The same holds true for the U.S.: The EU is its most important partner even before
Canada (2009: 21 percent of total merchandise trade).

Figure 2:
EU Exports of Goods, 2009                                U.S. Exports of Goods, 2009

Source: IMF, Direction of Trade Statistics, December 2010.

However, the real backbone and motor of transatlantic economic integration is investment. Ap-
proximately 50 percent of U.S. foreign direct investment (FDI) abroad (stocks, figures for 2008)

is located in the EU; the EU accounts for 63 percent of U.S. inward FDI stocks. Of the EU’s
FDI abroad (stocks, 2008), almost 33 percent is located in the U.S.; 43 percent of EU inward
FDI stocks have their origin in the United States. The following comparisons underline the im-
portance of transatlantic investment relations: Total U.S. FDI (stocks, 2008) in the EU is more
than three times higher than its FDI in all Asia-Pacific; and EU investment in the U.S. is around
eight times the amount of EU FDI in India and China taken together.10 Profits of American sub-
sidiaries in Europe have more than tripled since 1999, reaching $177 billion as of 2007; in the
same period, the profits of European subsidiaries in the U.S. have more than doubled.11 While
the transatlantic economy was not immune to the effects of the economic and financial crisis of
2008/2009, trade as well as investment flows are recovering again.12

Figure 3: U.S. - EU Foreign Direct Investment (Stocks) in USD (billions)

Source: U.S. Bureau of Economic Analysis, 2010.

The study Non-Tariff Measures in EU-U.S. Trade and Investment – An Economic Analysis that was
commissioned by the European Parliament shows that deeper integration through the removal of
non-tariff barriers offers considerable welfare gains.

Table 1: Summary of Macroeconomic Changes following NTM Reduction
                                        Ambitious Scenario            Ambitious Scenario           Limited Sce-       Limited Sce-
                                        (full liberalization),        (full liberalization),       nario              nario
                                             Long Run                      Short Run               (partial           (partial
                                                                                                   liberalization),   liberalization),
                                                                                                   Long Run           Short Run
Real income, billion €

10 Data on EU FDI: Eurostat, <http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=bop_fdi_pos&lang=de>,

Data on U.S. FDI: BEA, <http://www.bea.gov/international/di1usdbal.htm>.
11 Daniel Hamilton/ Joseph Quinlan, The Transatlantic Economy 2010, Washington, DC 2010, p. 8.
12 Eurostat, EU27 Überschuss im Warenverkehr mit den USA verdoppelte sich fast in den ersten sechs Monaten 2010, 18 November 2010,


USA                                     40.8                   19                                18.3              7.8
EU                                     121.5                  45.9                               53.6              19.4
Real income, % change
USA                                     0.28                  0.13                               0.13              0.05
EU                                      0.72                  0.27                               0.32              0.11
Value of Exports, % change
USA                                     6.06                  6.12                               2.68              2.72
EU                                      2.07                  1.69                               0.91              0.74
Value of Imports, % change
USA                                     3.93                  3.97                              1.74               1.76
EU                                      2.00                  1.63                              0.88               0.72
Source: Non-Tariff Measures in EU-US Trade and Investment – An                                Economic     Analysis, 2009,

However, the depth of transatlantic integration should not conceal some of the differences which
make political cooperation on many economic issues difficult as the following four case studies

Case Study I: Stabilizing the Economy – Spending versus Consolidation
The U.S. and the EU members were severely impacted by the financial and economic crisis 2007-
2009. The immediate crisis response was characterized by a high degree in transatlantic coopera-
tion, a period which Pisany-Ferry/Posen (2010) dubbed the ‘London consensus’ after the meet-
ing of the G20 leaders in London in April 2009.13 The transatlantic partners agreed on the need
of economic stimulus, bank rescues, an expansionary monetary policy, a reform of the financial
architecture and upgrading the former G20 of finance ministers to a leaders’ institution. At the
G20 summit held in Pittsburgh, in September 2009, the leaders decided not to withdraw stimulus
measures until a durable recovery was in place, to co-ordinate their exit strategies from the stimu-
lus measures, and to harmonize macroeconomic policies to avoid macroeconomic imbalances.14
However, some of the contentious issues which strained the transatlantic partnership in 2010 – in
Pisany-Ferry/Posen’s word the period of “Toronto divergence” – were already evident during
the early days of the crisis, the most visible being fiscal consolidation versus continued govern-
ment spending.
Although disagreement was by no means as severe as the media made it out, many American
observers criticized the EU and its members, foremost Germany, for not doing enough to halt
the downward spiral of the global economy. Specifically, the U.S. administration criticized the
German government for its relatively cautious fiscal programs and for Merkel’s refusal to support
a common European fund to bail out banks, as had been suggested by France holding the EU
Presidency in the second half of 2008, as well as a joint EU stimulus. President Barack Obama
himself jumped into the transatlantic fray, saying that given the United States’ aggressive stimulus
program, “it’s very important that other countries are moving in the same direction, because the

13Jean Pisany-Ferry / Adam Posen, 2010, p. 3.
14G20 Leaders Statement: The Pittsburgh Summit, 24-25 September 2009,
<http://www.g20.utoronto.ca/2009/2009communique0925.html>; Claudia Schmucker/ Katharina Gnath, From the G8 to the G20:
Reforming the Global Economic Governance System, GARNET Working Paper, Number 73, January 2009; Dick K. Nanto, The Global
Financial Crisis: Analysis and Policy Implications, Congressional Research Service, CRS Report to Congress RL34742, Washington
D.C. 2009.

global economy is all tied together.”15 Translation: Europe, and in particular Germany, had not
done enough and should have launched more aggressive stimulus spending to help drive global
demand. At the G20 summit in Pittsburgh, President Obama asked the leading export countries
to increase domestic demand in order to fill the gap left by U.S. consumers.

The U.S. Case
The financial and economic crisis was the most severe since the Great Depression of the 1930s.
What began as a bursting of the U.S. housing market bubble and a rise in foreclosures quickly
spread to the financial sector, spiraling into a global financial crisis and pulling the real economy
with it. During the last two quarters of 2008, U.S. economic growth declined by 4.0 percent and
6.8 percent respectively – the U.S. economy had not experienced such a severe hit since 1982.
During the first two quarters of 2009, the situation did not look much better: growth continued
to decline by 4.9 and 0.7 percent respectively. In 2009, the U.S. economy shrunk by 2.6 percent.16
The sources of the weakness were a continuing decline in consumer spending, a sharp downturn
in exports, a large reduction in business investment and a continuing decline in the housing sec-

Figure 4: Unemployment Rates (in percent)

Source: European Commission, Ameco Database, October 2010.

While economic growth picked up during the second half of 2009, gaining speed in 2010, recov-
ery remained shaky. With the persistent problems in the housing sector, many observers warned
against the risks of a double-dip recession. For an economy based so strongly on domestic de-
mand – 70 percent of GDP can be attributed to consumption – the high unemployment rate was
particularly worrisome. Even though the economy started to grow again (Q1: 3.7, Q2: 1.7, Q3:
2.6 percent), unemployment stayed remarkably high. In 2009, the rate climbed to 9.3 percent,

 Quoted in: “G20 Meeting to Test US Economic Leadership,“ in: National Public Radio, 11 March 2009.

 Bureau of Economic Analysis, National Economic Accounts,

<http://www.bea.gov/national/nipaweb/SelectTable.asp?Popular=Y> (accessed 2.24.2011).

reaching 9.6 percent in 2010.17 The unofficial unemployment rate, which includes people who are
not working full-time but would like to and people who are no longer registered as looking for
work, were estimated at approximately 16 percent in 2010. The rising number of long-term un-
employed also caused concern. More than 40 percent of all unemployed were out of work for
longer than six months. One of the reasons was the decline in residential mobility in America. As
a result of the ongoing tensions in the real estate market, many Americans refrained from moving
to U.S. states with stronger growth rates because they would be forced to sell their homes for less
than the value of their mortgages. In light of these circumstances, the OECD (2010) estimated
that it could take years before the unemployment rate sank back to its pre-crisis level.
To stabilize the financial sector and to rejuvenate economic growth, the U.S. government passed
several rescue and stimulus measures. Under the $700 billion Troubled Asset Relief Program
(TARP, enacted October 3, 2008), the Treasury invested in dozens of struggling banks and other
financial institutions such as AIG as well as in the automobile industry (General Motors, Chrys-
ler). In February 2009, Congress passed the American Recovery and Reinvestment Act (ARRA).
The $787 billion stimulus package included federal tax incentives, expansion of unemployment
benefits and other social welfare provisions, as well as domestic spending in education, health
care, and infrastructure.18 Estimates of the effects of ARRA on GDP growth vary widely. The
Congressional Budget Office projected an increase in GDP of between 1.5 and 4.1 percentage
points and a decrease in the unemployment rate of between 0.7 and 1.8 percentage points in
2010.19 Given high unemployment and the persistent problems in the housing sector, Congress
passed a second stimulus bill in mid-December 2011. The Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010 not only extended President George W. Bush’s
temporary income tax cuts (including those for higher income classes – a particularly contentious
issue between Democrats and Republicans). The $858 billion package also included a reauthoriza-
tion of federal unemployment extension benefits for another 13 months ($801 billion of tax cuts
and $57 billion for extended unemployment insurance).20
In the light of these developments it comes at little surprise that Secretary of the Treasury Timo-
thy Geithner still argued at the Brookings Institution in early October 2010: “The greatest risk to
the world economy today is that the largest economies underachieve on growth.”21 At the meet-
ing of the IMF International Monetary and Financial Committee a few days later, Geithner stated:
“We need to continue providing well-targeted support for the recovery in the near term even as
we put in place plans to help ensure fiscal sustainability over the longer term”.22
While balancing the budget was not a viable option yet, the President committed to cutting the
fiscal deficit in half by 2013, and to stabilizing the debt-to-GDP ratio by 2016. Early 2010 he
assigned the newly created bipartisan National Commission on Fiscal Responsibility and Reform

17 Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey,

<http://data.bls.gov/pdq/SurveyOutputServlet?data_tool=latest_numbers&series_id=LNS14000000>(accessed 2.24.2011).
18 Kristin Francoz, A Report on Fiscal Stimulus, Peterson G. Peterson Foundation, 2 November 2010,

19 Congressional Budget Office, Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from

October 2010 through December 2010, February 2011, <http://www.cbo.gov/ftpdocs/120xx/doc12074/02-23-ARRA.pdf>.
20 The White House, Tax Cuts, Unemployment Insurance and Jobs, 17 December 2010, <http://www.whitehouse.gov/taxcut>.
21 The Path to Global Recovery: A Conversation with Secretary of the Treasury Timothy Geithner, 6 October 2010,

22 Statement by Timothy F. Geithner, Secretary of the Treasury, at the International Monetary and Financial

Committee (IMFC) Meeting, IMF, 9 October 2010, <http://www.imf.org/external/am/2010/imfc/statement/eng/usa.pdf>.

with identifying policies to improve the fiscal situation in the medium term and to achieve fiscal
sustainability over the long run.23 Consolidating the budget will play a considerable greater role in
2011. When the fiscal year ended in September 2010 the budget deficit stood at 8.9 percent of
GDP. According to a survey conducted by the CNN/Opinion Research Corporation 52 percent
of U.S. citizens believed that Obama was handling the budget well in March 2009, while only 36
percent were of the same opinion in October 2010.

The European Case
While in the early days of the financial and economic crisis many European members perceived
the downturn as a purely U.S. phenomenon, the effects on the EU became brutally clear in fall
2008. Economic growth slowed down to 0.7 percent in the EU in 2008 (Euro area: 0.5 percent)
and decreased by 4.1 percent (Euro area: 4.1 percent) in 2009. The European economy started to
grow again in 2010 (1.7 percent), however, with large differences between member states.
On October 29, 2008, the European Commission released its Communication “From Financial
Crisis to Recovery: A European Framework for Action”24 as an attempt to coordinate the actions of the
27 EU members in combating the economic and financial crisis. The framework pointed out the
need for a new financial architecture at the European level and stimulus measures to deal with
the impact on the real economy. At the same time, it asked members that faced higher than ex-
pected levels of fiscal or monetary stimulus to accompany stimulus measures with structural re-
forms.25 On November 26, 2008, the European Commission proposed a €200 billion recovery
plan or 1.5 percent of EU GDP. The largest part should come from national budgets (around
€170 billion, 1.2 percent of GDP), while the EU and European Investment Bank budgets would
contribute a small share of around €30 billion, 0.3 percent of GDP.26 The members of the Euro-
pean Council approved the plan in a meeting on December 12, 2008. The European Commission
was at the time criticized, for instance by members of the European Parliament, for not being
able to convince the member states of a larger EU-level contribution. In January 2009, it pro-
posed to mobilize €5 billion from the EU budget in order to invest in Internet infrastructure and
energy,27 but this proposal met with strong reluctance by some member states. In spring 2009,
the IMF very outspokenly criticized not only national stimulus packages which it deemed being
too low, but also pointed out that more action was needed on the EU level in order to prevent
rising divergence.28 At that time, the main concern was that Central and Eastern European mem-
ber states would strongly fall behind EU average recovery if there was no additional support

23 Fiscal Commission.gov, About the National Commission on Fiscal Responsibility and Reform,

<http://www.fiscalcommission.gov/about/> (accessed 2.27.2011); White House, Executive Order – National Commission on Fiscal
Responsibility and Reform, 14 February 2010, <http://www.whitehouse.gov/the-press-office/executive-order-national-commission-
24 From Financial Crisis to Recovery: A European Framework for Action, Communication from the EU Commission, Brussels, 29 Octo-

ber 2008, <http://ec.europa.eu/employment_social/esf/docs/from_crisis_to_recovery_en.pdf>.
25 James Jackson, The Financial Crisis: Impact on and Response by The European Union, Congressional Research Service, CRS Report to

Congress, R40415, Washington D.C. 17 March 2010, p. 17.
26 The Commission Launches a Major Recovery Plan for Growth and Jobs, to Boost Demand and Restore Confidence in the

European Economy, Press Release Rapid, 26 November 2008,
27 Press release: The Commission proposes € 5 billion new investment in energy and Internet broadband infrastructure in 2009-

2010, in support of the EU recovery plan, 28 January 2009,
28 IMF urges EU to upgrade its recovery plan, Euractiv, 13 May 2009, <http://www.euractiv.com/en/euro/imf-urges-eu-


through the EU. Within a few months, the focus changed and the Eurozone periphery countries
which were caught by the sovereign debt crisis moved to the forefront of crisis management.
The European recovery measures did not only include some coordination of national stabiliza-
tion packages plus a limited amount of additional EU spending, but also allowed for flexibility
under the Stability and Growth Pact. However, as already at the start of 2009 a large number of
member states was in breach of the three percent-of-GDP deficit limit, the political concern was
to establish a very clear commitment to consolidation in the medium-term. European Commis-
sion President Manuel Barroso warned against disproportionate use of this flexibility, as it could
result in “a downward spiral of debt” that would jeopardise growth in the future.29 Thus, while
European governments passed large rescue packages to stabilize their financial sector and
adopted large fiscal measures to stimulate their economies, the need for fiscal responsibility was
emphasized continuously.
A particular strong proponent of structural reforms and budget discipline was Germany. Chan-
cellor Merkel and her then finance minister, Peer Steinbrück, vice chairman of the Social Demo-
cratic Party (SPD), rebuffed all calls for more aggressive fiscal action and leveled their own criti-
que of the U.S. response to the crisis. In their opinion, profligate fiscal spending would have po-
tentially drastic inflationary consequences, lead to unsustainable deficits, and crowd-out private
investment. German policy-makers thus reacted not only later and more hesitantly than their
American counterparts, Merkel also attempted to block the EU plan to provide an EU-wide eco-
nomic package to stimulate growth. The Grand Coalition’s first attempt at combating the unrave-
ling financial crisis came in November 2008, when the government put through the first of two
stimulus packages. It came only after much political debate and hand-wringing.30 The first stimu-
lus package—for which the government earmarked around €31 billion over two years — sought
to support growth by incentivizing investment and long-term infrastructure projects more than it
did consumption. It ensured continued credit flows to small- and medium-sized businesses, ex-
tended so-called short-term work from 12 to 18 months, provided infrastructure spending, and a
tax write-off for spending on housing and renovations. On the consumption side, it offered help
for the auto industry by including a tax exemption for purchases of new cars.31
As the crisis continued and economic forecasts in Germany and the Euro area grew more grim
throughout the fall of 2008 and into early 2009, the Grand Coalition moved toward a second and
more aggressive stimulus program. Totaling nearly €50 billion over two years 32 , the package
passed in February 2009 called for €17 billion in new public investment and tax relief, including
reductions in payroll contributions, further support of short-term work and further support of
consumption and the auto industry through granting tax breaks for people who scrap older cars
and buy new ones (cash-for-clunkers, or Abwrackprämie). The government also appropriated an
additional €100 billion in credits for the publicly-held KfW bank to underwrite credit to strug-

29 “Manuel Barroso, President of the European Commission, A European Economic Recovery Plan, Press Conference, Brussels 26

November 2008, <http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/08/654>. .
30 Stormy Mildner and Mark Prentice, “Germany’s Social Market Economy, Old Wine in Old Bottles? How the Social Market

Economy Influenced the Management of the Economic Crisis,’ in: AICGS (Eds.), Germany's Founding Pillars at 60: Future Challenges
and Choices, Washington D.C., August 2009, S. 7-20.
31 Die Bundesregierung, Konjunkturpaket I und II: Impulse für die Wirtschaft,

<http://www.bundesregierung.de/Content/DE/Artikel/2009/01/2009-01-12-konjunktur-2.html> (accessed 2.27.2011).
32 Bundesministerium der Finanzen, Stellschrauben des Konjunkturpakets 2,

nkt__konjunkturpakete/Stellschrauben-des-Konjunkturpakets-2/075__in__Bewegung__halten.html> (accessed 2.27.2011).

gling companies, as well as a special credit program for small- and medium-sized businesses and
increased availability of export guarantees.33 This second stimulus packages brought the Coali-
tion’s total stimulus spending during the crisis to over €80 billion over 2009 and 2010.34
Even in the midst of the crisis, German politicians and policymakers moved to ensure that, once
the crisis subsides, the country will once again have a balanced, or at least nearly balanced, budget:
In June 2009, German legislators moved to limit public debt levels through a constitutional
amendment. Passed by the required two-thirds majority in the Bundestag and by the upper house,
the Bundesrat, by a margin of 13-3, the law is primarily aimed at states’ budgets and only allows
states to take on new debt to pay off old debt beginning in 2020. For the federal budget, the new
law will take effect in 2016 and will limit new borrowing to 0.35 percent of the country’s GDP.
While the new amendment includes several exception clauses, allowing the federal government to
bypass most of the law’s provisions by declaring an emergency, governments will be constitution-
ally obligated to reduce their debts to the specified levels during times of economic growth and
increasing government revenue.35 Seeking to move away from the current deficit spending and
towards the days of balanced budgets before the outbreak of the financial crisis and recession,
German lawmakers made fiscal discipline a matter of constitutional law.
Within the EU, Germany with a group of other, mostly smaller member states with a traditionally
strong preference for low inflation and sound budgets (such as Austria, the Netherlands and Fin-
land), has constantly put pressure on fellow member states to return to a path of budgetary con-
solidation. France, which in comparison to Germany ran a more expansionary fiscal policy, is
situated somewhat between the high deficit, high debt countries and Germany. In 2009, President
Nicolas Sarkozy set up an advisory group to study whether France should follow Germany’s ex-
ample and introduce a constitutional rule or at least a law to limit public debt levels.
With the sovereign debt crisis spreading from Greece to other highly indebted countries (such as
Ireland, Portugal, Spain and potentially Italy and Belgium), the debate on fiscal rules has reached
the European level. First of all, a legislative proposal has been tabled by the European Commis-
sion to harden the so-called Stability and Growth Pact, i.e. the rules for surveillance and co-
ordination of budgetary policies in the EU. A second piece of legislation is supposed to improve
national fiscal frameworks in order to re-shape domestic institutional conditions in such a way
that public finances are likely to be sound. 36
Moreover, Germany and France together have proposed a so-called Pact for Competitiveness
which both governments tabled just before the European Summit of February 4, 2011. It sug-
gests intergouvernmental coordination between the Heads of State and Government of the Eu-
rozone and lists a selection of issues (ranging from concrete pension reform proposals to national

33 Bundesministerium für Wirtschaft und Technologie, Konjunktur II, <
http://www.bmwi.de/BMWi/Navigation/Wirtschaft/Konjunktur/konjunkturmassnahmen.html > (accessed 2.27.2011).
34 International Monetary Fund, The Size of the Fiscal Expansion: An Analysis for the Largest Countries, Washington D.C. February 2009,

<http://www.imf.org/external/np/pp/eng/2009/020109.pdf> (accessed 2.27.2011).
35 “Bundesrat beschließt Schuldenbremsen,“ Spiegel Online, 6 June 2009. „Bundesrat verankert Schuldenbremse im Grundgesetz,”

FOCUS Online, 12 June 2009, http://kurse.focus.de/news/UPDATE-Bundesrat-verankert_id_news_109095078.htm. Cf. “Schul-
denbremsen durch den Bundesrat verabschiedet,” Bundesministerium für Finanzen, 12 June 2009,
36 The overall six legislative proposals to reform EU economic governance can be accessed through the web page of the Euro-

pean Commission, which also contains explanatory notes on each of them:

fiscal rules). Although the proposal provoked open opposition by several member governments,
it will probably become part of the “Comprehensive Package” on EU economic governance
reform which is to be decided upon at the Spring summit on 24/25 March 2011.
In a nutshell, the EU is currently in the midst of tedious negotiation processes over the future
governance mechanisms, in which budgetary policies after the surveillance and coordination fail-
ures of the first 12 years of the EMU play a predominant role. So far, there is no unanimity over
the question to which degree budgetary austerity should be anchored in European rules, in how
far a breach should be subject to political or quasi-automatic sanctions and whether national fis-
cal rules should back-up the European governance framework. Beyond this rules-based approach,
there is very little discussions on further conclusions that could also be drawn from the last few
years, namely whether at least the 17 EU member states should take the US as an example and
introduce some kind of fiscal stabilization mechanisms on the European level in order to enable
the EU (or at least the Eurozone) to better cope with future asymmetric economic shocks.

Explaining Convergence and Divergence
With a common interest in seeing a rejuvenated global economy, how can we explain the differ-
ent approaches to crisis management and exit strategies? One answer is timing and the economic
and financial situation: The downturn came later to Europe than it did in the United States;
Germany’s economy only began to contract in the fourth quarter of 2008, when it shrunk by 2.1
percent, while the U.S. economy saw a decline of 6.8 percent. Germany’s business cycle was
about a year behind that of the United States. Driven by global demand, export supported recov-
ery also kicked in comparatively early in Germany (2009), which explains – at least partially – the
early preference for budget consolidation in Berlin, in contrast to other EU member states which
have to rely more on domestic demand in their recovery.

Figure 5: Gross Domestic Product (constant prices percent change)

Source: International Monetary Fund, World Economic Outlook Database, October 2010.

For the U.S., the year 2010 was still one of remarkable insecurities. While recovery was well un-
derway, the risks of a double-dip recession were not yet contained. Furthermore, U.S. employ-
ment had declined much more than in Europe. Unemployment still hovered around 9.7 percent –
levels not seen since the early 1980s. The U.S. has seen some increase in private savings. Personal
saving as a percentage of disposable personal income was 5.3 percent in December 2010.37 But
while deleveraging of private households had started, the gross debt-to-income ratio remained
high, decreasing only from 134.4 percent in 2007 to 122.7 percent in 2010.38 Taking into account
the limitations of U.S. unemployment insurance, the call for further stimulus measures becomes
quite understandable.

Figure 6: Household Dept to Disposable Income Ratio (in percent)

Sources:    Eurostat  (accessed: 2.24.2011); EconStats, Balance Sheet            of   Households   and   Nonprofit   Organizations,
<http://www.econstats.com/fof/fof_BB__1a.htm> (accessed: 2.24.2011).

But more than timing was at play in explaining the diverging response to the economic crisis.
Pisani-Ferry/Posen (2010) point to perceptions on the consequences of the financial and eco-
nomic crisis. They found that U.S. policy-makers were much more optimistic about the effects of
the crisis on potential out-put than their European counterparts. Likewise, U.S. policy-makers
seem to view the rise in unemployment as cyclical rather than structural. Therefore, they advo-
cated further stimulus measures. Contrary to this, the European Commission expected greater
damage to potential output which reduced the scope for demand-side policies and created a
greater need for budget consolidation.39
Germany’s particular preference for consolidation has historical roots. With hyperinflation and
economic chaos of the 1920s hanging heavy in the nation’s collective memory, German politi-
cians and policymakers argued that deficit spending is ineffective in fostering long-term growth
and that a high level of government debt would lead to inflation. This strong fiscal conservatism
reached in fact beyond the traditional CDU base and across political and public opinion. Much of
this is also due to the experiences of the 1990s: The large expenditures required for rebuilding
37 Bureau of Economic Analysis, Personal Income and Outlays, December 2010,

<http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm> (accessed: 2.24.2011).
38 EconStats, Balance Sheet of Households and Nonprofit Organizations, <http://www.econstats.com/fof/fof_BB__1a.htm> (accessed:

39 Pisani-Ferry/Posen (2010), p. 6.

eastern Germany, the national debt that Germany incurred in doing so, and their attempts to
balance the budget in the late 1990s led to slow growth rates. One of the successes of the Grand
Coalition had been to avoid deficit spending and, in 2007, the federal government was nearing a
balanced budget before the outbreak of the financial crisis.40

Figure 7: Net Saving Rate (in percent)

Source: European Commission, Ameco Database, October 2010.

Apart from timing, perception, and ideology structures played a considerable role. Chancellor
Merkel in particular refused to undertake further government spending arguing that multiplier
effects of consumption-targeted stimulus spending was exceedingly low in Germany because it its
heavily export-dependence. Exports of goods and services to GDP are 41 percent in Germany
(2009). For the U.S., whose growth depends much more on domestic demand, this figures
reached only 11 percent in 2009.41 German consumers have also demonstrated a historically high
personal savings rate. While savings rates declined from a high of about 13 percent in 1991 to
near 9 percent in 2000, savings rates had once again begun to reach the post-unification average
of approximately 11 percent since 2001.42 Annual saving rates in the U.S. only averaged 2.7 per-
cent between 2000 and the onset of the crisis in 2007.43 With this high savings rate of consumers,
German policy-makers argued that tax rebates would do little if anything to stimulate growth in
the German economy and probably just lead to more saving and thus do little to spur export
demand. Instead, German policy-makers made investment the priority, providing tax breaks for
businesses and export credits, among other measures. Contrary to this, supporting domestic de-
mand was an important component of U.S. stimulus measures,44 just like in some EU member
states which rely heavily on domestic demand as the main source of growth, such as France.
The automatic stabilizers were another structural factor which can help to explain transatlantic
divergence. Throughout their management of the financial crisis, German policymakers negated
the need for further direct stimulus pointing at the social safety. Through increased welfare

40 Mildner/ Prentice, 2009, p. 13.
41 World Bank, Exports of Goods and Services, <http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS> (Zugriff 20.2.2011)
42 Halbjahr 2008: Haushalte sparen mehr, Pressemitteilung Nr. 400, Statisches Bundesamt Deutschland, October 2008.
43 Bureau of Economic Analysis, Personal Income and Outlays, December 2010,

<http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm> (accessed: 2. 24.2011).
44 Mildner/ Prentice, 2009, p. 14 f..

checks, unemployment benefits, and job protections, it provides for increasing public spending
into the economy, thus serving as an automatic stabilizer. According to IMF estimates, Germa-
ny’s 2009 stimulus spending was 1.5 percent of GDP, slightly lower than the U.S.’s stimulus plan,
which accounted for nearly 2 percent of GDP. However, because of Germany’s large social safe-
ty net and its larger automatic stabilizers, the cumulative effect of the German stimulus spending
was actually much higher. According to the IMF, Germany’s automatic stabilizers contributed an
additional 1.7 percent of GDP to the stimulus measures, making total stimulus spending 3.2 per-
cent of GDP in 2009. By comparison, in the United States total stimulus spending, combined
with spending provided by the automatic stabilizers in the American safety net, brought the total
stimulus effect to approximately 4.8 percent of GDP.45
In the EU, the framework for budgetary surveillance and coordination constantly sent a “consol-
idation impulse” into national debates. Although, in the midst of the crisis, 26 out of 27 member
states were actually breaching the Pact, constant surveillance procedures and the insistence that
austerity was needed by the European Commission, some member states and backed by the ECB,
did impact national debates.

Figure 8: General Government Gross Debt (% of GDP)

Sources: International Monetary Fund, World Economic Outlook Database, October 2010.

Given debt-to-GDP-ratios which have seriously deteriorated since 2008, long-term sustainability
of public finances has moved to the forefront of the debate on national budgets in the EU. Here,
crisis effects and long-term trends coincide. Data shows that due to the ageing population, a ma-
jority of EU member states will face severe budgetary sustainability problems, some in the not
too far away future. Hence, an adjustment of previous policies is key.
More important, even, is the disciplining effect of the sovereign debt crisis. Those governments,
which either sought help from the EU and the IMF under the provisions for Eurozone members
(Greece and Ireland) as well as the three non-Eurozone countries (Latvia, Romania and Hugary)

45 IMF, Note by the Staff of the International Monetary Fund, Group of Twenty: Meeting of the Deputies, 31. January – 1. February 2009, Inter-

national Monetary Fund, Washington D.C. 2009, <http://www.imf.org/external/pubs/ft/survey/so/2009/pol020709a.htm>.

which were granted balance of payment loans by the European Commission and the IMF in
2008/2009, all had to accept severe conditionality linked to the loan imposed. For those govern-
ments which are at the brink of needing liquidity aid but who do not want to ask for credit and
loans (such as Spain and Portugal, and in the future possibly also Belgium), the politically deter-
ring sample cases of Ireland and Greece combined with lasting market pressure, put national pol-
icies on ambitious reform and consolidation tracks. Even for others, who are not at the brink of a
sovereign debt crisis, the new scrutiny by market actors has important effects. Observers attribute
for instance France’s new interest in domestic fiscal rules at least partly to the perceived need to
increase the consolidation track of the government and the domestic institutional framework – in
order not to lose its AAA-rating.
Last but not least, politics matters. In the US, the last economic stimulus passed by Congress in
December 2010 was clearly influenced by the mid-term elections. Polls show that in the run-up
of the mid-term elections, two thirds of all voters used the elections to express their discontent
with Obama’s political “balance sheet.” The major concern of voters was clearly the economy,
particularly with regard to the labor market. According to polls conducted by the CNN/Opinion
Research Corporation, in August 2009, 44 percent of US citizens felt that Obama’s policies had
improved the economic conditions in the country – in October 2010, this rate dropped to 36
percent. The Democrats, which had lost the House of Representatives to the Republicans,
wanted to pass another stimulus before the latter took over in January 2011. To secure the neces-
sary votes to pass the legislation, they agreed to a compromise: In return for an extension of un-
employment aid and tax cuts for the middle class, they agreed on extending President Bush’s
2001 tax cuts for higher income households.
Politics also explain why little has been achieved with regard to balancing the budget so far. In
November 2011, the National Commission on Fiscal Responsibility and Reform issued several
recommendations to balance the budget. However, the members of the commission could not
agree on a common approach. Arguing that higher taxes and deficits strangle private business,
Republicans believe public spending destroys jobs and hinders economic growth and thus they
reject any measures of this kind. In their “Pledge to America” agenda, Republicans call for an end
to what they label the Keynesian experiment. They want government spending to be reduced to
pre-crisis levels and view tax cuts (including tax cuts for wealthy Americans) as the appropriate
means to increase domestic demand and stimulate the economy. Democrats, on the other hand,
did not rule out tax increases to balance the budget.
In the EU member states, electoral cycles obviously also influence budgetary policy making. One
striking example is Ireland, where the probable new coalition partners, might seek a renegotiation
of the interest rate of the EU/IMF loans and could turn away from the severe budgetary austerity
program prescribed by the lenders. A different case in is the UK, where the Conservative Party
won the 2010 general elections with a very clear message that it would have to implement serious
budgetary consolidation efforts as the country had run into a budgetary situation on the verge of
unsustainability. What can be said, on average, is that the urgency of the sovereign debt crisis and
the increasing efforts by the European Commission and some member states to emphasize the
need for consolidation, have led to a situation where politics and electoral cycles are probably less
likely to lead to expansive fiscal policies than in “normal” times. A further factor is key: as a result
of the sovereign debt crisis, market actors now very closely scrutinize individual country cases,

while in the first 11 years of EMU there was too little country-specific risk assessment as all
members of the Eurozone where grated a kind of euro-bonus. Without wanting to imply that we
assume that markets always react rationally (rather quite the contrary in certain phases of the cur-
rent debt crisis), it can be said that since 2009, markets mechanisms are back in the EU as maybe
the most powerful disciplining device to push member governments towards consolidation.

Case Study II: Global Macroeconomic Imbalances – Numerical Targets
Over the past years, countries like China, the oil and gas exporters of the Middle East have ac-
cumulated large trade surpluses while the U.S. experienced growing deficits. Germany is among
the states which a large trade surplus, while the EU as such is almost balanced. At the same time,
China’s foreign-exchange reserves climbed to record heights, reaching $2.4 trillion at the end of
December 2009, while the U.S. faced massive capital inflows from foreign governments, fore-
most China, Japan and oil exporting countries.
The transatlantic partners agree that macroeconomic imbalances pose a problem 1. if they are the
consequence of inefficient international capital allocation between countries with different saving,
investment and consumption preferences; 2. if exchange rates are manipulated, automatic ad-
justment mechanisms of de- and revaluation do not work, or exports are subsidized; or 3. if ac-
cumulated obligations seize to be financeable so that confidence in the solvency of deficit coun-
tries is undermined. The consequences of such systemic macroeconomic imbalances are misallo-
cation of capital and financial bubbles. How dangerous persistent macro-economic imbalances
are, was revealed by the recent economic and financial crisis, when large capital flows into the
U.S. drove down costs of credits and thus contributed to the bubble in the housing sector.46 The
U.S. and the EU also agree that the deficit countries cannot resolve their imbalances acting alone.
The transatlantic partners differ, however, on how to reduce the global macroeconomic imbal-
ances. At the G20 meeting in Pittsburgh, the leaders only agreed on a new “Framework for
Strong, Sustainable and Balanced Growth” under which they would review each others’ national
economic policies. Supervised by the IMF, the main coordinating instrument was to be a process
of mutual assessment and peer pressure; clear numerical targets as suggested by the US as well as
enforcement mechanisms, such as penalties or sanctions, were left out of the agreement.47 The
two largest member states of the EU, France and Germany, deeply disagreed over the US pro-
posal. Paris first greeted the suggestion to define a limit for trade imbalances to GDP48, which
appeared in the debate before the Seoul summit. Germany, shoulder-to-shoulder with China,
meanwhile wiped this idea off the table, and the EU has now formulated a joint position. At the
G20 summit in Seoul late 2010, the leaders only agreed to work on indicators to measure the
sustainability of imbalances.
At their first meeting under French G20-Presidency in February 2011, the G20 ministers identi-
fied a set of indicators to focus on persistently large imbalances which require policy actions:
public debt and fiscal deficits; and private savings rate and private debt; and the external imbal-

46 Eric Helleiner, “Understanding the 2007-2009 Global Financial Crisis: Lessons for Scholars of International Political Econo-
my,” in: Annual Review of Political Science, 14, 2011, p. 67-87 (here: 77).
47 G20 Leaders Statement: The Pittsburgh Summit, 24-25 September 2009,

<http://www.g20.utoronto.ca/2009/2009communique0925.html>; Claudia Schmucker/ Katharina Gnath, From the G8 to the G20:
Reforming the Global Economic Governance System, GARNET Working Paper, Number 73, January 2009.
48 G20: EU Split over US Offensive against Global Imbalances. European Information Service, 25 October 2010.

ance composed of the trade balance and net investment income flows and transfers. No consen-
sus could be reached with China over the real exchange rate and foreign-exchange reserves as
additional indicators. The G20 finance ministers hence agreed on taking due consideration of
exchange rate, fiscal, monetary and other policies. By the next meeting in April, the ministers
want to set forth indicative guidelines against which each of these indicators will be assessed.49

The U.S. Case
The Obama administration strongly urged the other economic powers to agree to curb persistent
trade surpluses and deficits. In his letter to the G20 in the run-up of the summit in Seoul in No-
vember 2011, Treasury Secretary Geithner demanded: “G20 countries with persistent surpluses
should undertake structural, fiscal and exchange rate policies to boost domestic sources of
growth and support global demand.”50 Deficit countries should stabilize their public indebtedness
over the medium term and raise exports, while surplus countries should undertake structural,
fiscal and exchange-rate policies to increase domestic demand. “Since our current-account bal-
ances depend on our own policy choices as well as on the policies pursued by other G-20 coun-
tries, these commitments require a cooperative effort”. Geithner also asked the G-20 countries to
refrain from “exchange-rate policies designed to achieve competitive advantage by either weaken-
ing their currency or preventing appreciation of an undervalued currency.” He continued by em-
phasizing that G20 emerging market countries with significantly undervalued currencies and ade-
quate precautionary reserves needed to allow their exchange rates to adjust fully over time to le-
vels consistent with economic fundamentals.51 While the U.S. did not officially proposed a quan-
titative target, ministers discussed setting a norm for current account imbalances of less than 4
per cent of gross domestic product, with persistent breaches triggering negotiations for its reduc-
The main culprit in the eyes of the U.S. is China. The U.S. trade deficit with China was approx-
imately $240 billion in 2010 – slightly down but nonetheless the largest that the U.S. has had with
any country and largest in the world between any two countries. For years, the U.S. has accused
China of currency manipulation as China has pegged its currency, the renmimbi, to a basket of
currencies which includes the dollar, keeping its value too low. In early February, a bipartisan
group in the House of Representatives reintroduced a bill that would allow the U.S. to impose
emergency tariffs against China if its currency was found to be undervalued. The action came
shortly before the meeting of the G20 finance ministers in Paris. This was, however, not the first
time Congress threatened sanctions.52 Late September 2010, the House of Representatives passed
the Currency Reform for Fair Trade Act. The bill had envisioned an across-the-board tariff if
China was found to manipulate its currency, thus subsidizing its exports and creating an unfair
competitive advantage for its goods. While the bill passed with a clear majority (the totals were
348 ayes, 79 nays, 6 present/not voting), it was not voted on by the Senate and thus cleared from

49 Communiqué. Meeting of Finance Ministers and Central Bank Governors, Paris 18-19 February 2011,

50 US Treasury Geithner's Letter to G20 Colleagues, Full Text, International Business Times, 22 October

Sewell Chan, “Nations Agree on Need to Shrink Trade Imbalances,” in: The New York Times, 22 October 2010.
51 US Treasury Geithner's Letter to G20 Colleagues, 22 October 2010.
52 Alan Beattie, ”US Lawmakers Revive China Currency Bill”, in: Financial Times, 10 February 2011.

the book with the end of the 111th Congress. Most observers expect the new Chinese Currency
Bill to fail in the Senate. However, Congress expects a tough stance on China by the Treasury.

Figure 9: U.S. Bilateral Trade Deficits (trade in goods, in billion Dollar and % of total deficits)

Source: IMF, Direction of Trade Statistics, (accessed: 2.20.2011).

But the U.S. does not only criticize China when it comes to global macroeconomic imbalances.
While Europe as a whole was in external balance before the crisis, the U.S. repeatedly pointed to
the large internal imbalances, which contributed to the Euro crisis: the large trade surpluses of
Germany and the large deficits of the Euro area periphery. “The painful adjustment by the peri-
phery countries will be easier to sustain if it is accompanied by sustained increases in domestic
demand in the surplus countries within Europe,” Assistant Secretary Charles Collyns argued in
early 2011.53
The U.S. has also recognized the need for adjustment at home: less domestic consumption and
more exports. In his 2010 State of the Union Address, Obama announced his goal to double
exports and thus create 2 million new jobs within five years. In March 2010, President Obama
unveiled his new export initiative: creating a new Cabinet-level focus on U.S. exports, expanding
export financing, prioritizing government advocacy on behalf of U.S. exporters, providing new
resources to U.S. businesses seeking to export, and ensuring a level playing field for U.S. expor-
ters in global markets.54 “The fact is other countries haven't always played by the same set of rules.
America hasn’t always enforced our trade rights, or made sure that the benefits of trade are
broadly shared,” Obama said, promising to ensure a more level playing field for American work-

53 Remarks by Assistant Secretary Charles Collyns on ‘The Transatlantic Relationship and the G20’, 20 January 2011,

54 The White House, Facts on President Obama’s National Export Initiative, America.gov, 11 March 2010,

55 Quoted in: Doug Palmer, “Obama Outlines Strategy to Boost Exports”, in: Reuters, 11 March 2010,


The European Case
As already mentioned above, while the current account of the European Union is more or less
balanced, several European member countries have large surpluses or deficits. This has not only
led to differences between the EU representatives in the G20 debates, but also opposes the Eu-
ropean governments in the running negotiations on setting up a macro-economic surveillance
and coordination procedure in the EU.
The country with the largest trade surplus is Germany with 6.1 percent of GDP (2009). Fearing
interference with domestic economic policy decisions, Germany rebuffed the U.S. demands for
trade balance targets. The German economic minister, Rainer Brüderle, told reporters that the
proposal could be viewed as a reversion to “planned economy thinking.”56 While some of its
trading partners have repeatedly accused the country of wage dumping, Germany points to its
competitive advantage and the many painful reforms it has pushed through in previous years. It
expects similar reform in the deficit countries. “One thing is clear,” the German Association of
Banks argued, “if the overall competitiveness of the Euro area is not to deteriorate, the less com-
petitive member states must catch up. The solution cannot be to tie a ‘deadweight’ to the Ger-
man economy.”57
Not all European countries agree with this interpretation. For instance France and the UK agreed
to the U.S. proposal.58 There are some parallels between the G20 debates and the European dis-
cussions over coping with macroeconomic imbalances in the Eurozone. In this latter context,
Germany takes a very clear position, trying to fend off all coordination proposals that would also
oblige the surplus countries to reduce imbalances. Since the start of the debate, Germany has
argued for an asymmetric approach with the deficit countries bearing the adaptation efforts.
Meanwhile, French politicians (including Finance Minister Lagarde) and commentators have sug-
gested that Germany should do more for domestic demand, e.g. by raising wages, liberalizing the
service sector, or the like. Also other European partners have criticized German economic poli-
cies, sometimes even blaming Greek problems on German success. Repeatedly, European part-
ners have voiced their expectations towards Germany, not only to rely on its export success, but
to contribute to growth in the Eurozone (in particular in the less competitive periphery, some
critics argue), by fuelling domestic demand.
The legislative proposal on macroeconomic policy coordination in the EU tabled by the Euro-
pean Commission in September 2010 leaves scope for an symmetric approach, in which both
countries with excessive deficits and surpluses would have to accept pressure on their economic
policies. The debt crisis stricken member states, which have run severe current account imbal-
ances over the last years, strongly prefer a coordination mechanism which can also push surplus
countries to adjusting their economic policies. But their negotiation position is not necessarily
very strong in the current legislative process, so is it rather unlikely that the EU will agree on a
framework with numerical targets and sanctions for surplus countries.
With regard to G20 negotiations, the EU increasingly seeks to defend common positions. It is
now not only represented by the leaders of the five European G20 members, Germany, France,

56 Quoted in: “Germany Warns against Planned Economy Thinking at G20”, in: Reuters, 22 October 2010,

57 Bundesverband der deutschen Banken, More Stability by Reducing Macroeconomic Imbalances, Berlin, May 2010, p. 4.
58 G20: EU Split over US Offensive against Global Imbalances, eis, 25 October 2010.

the UK, Italy and Spain, but also by the President of the European Council, Herman Van Rom-
puy and European Commission President Manuel Barroso. The European member states are
clearly under pressure to find their space in a potentially emerging G2 world in which key negoti-
ations are happening between those partners who are not only fundamentally dependent on each
other, but likewise deeply opposed over key issues: China and the United States.
Germany is politically in an interesting situation. On the one hand, there is a rift between Berlin
and Washington over different views of coping with imbalances. On the same issue, it is also
rather isolated in the current EU negotiations. But in the G20 format, the EU has recently sided
with the U.S. against China – with Germany putting itself into a key moderating role. At the Paris
Finance Minister meeting in February, Germany’s Finance Minister Wolfgang Schäuble is re-
ported to have played the key mediator role between China and its critics which enabled the
agreement on at least some indicators and provides the base for further work on marco-
economic surveillance in the G20 context.59
In addition to the indicators, the European G20 members are keen to push exchange rate issues
onto the agenda. Before taking over the Presidency of the G20 at the end of 2010, France’s Pres-
ident Nicolas Sarkozy had announced that he sought to establish a new global monetary system.
While his tone has become much more modest since, the European governments – in particular
in times of an appreciating euro – have a strong interest to discuss exchange rate regimes. While
the EU member states agree with Washington on the issue of the yuan, they are also frustrated
whenever the Dollar hits new lows which is interpreted as the consequence of the Fed’s decision
to further ease monetary policies. “There will be no success in rebalancing growth without ad-
dressing currency tension”, Commission President Barroso said during a speech to the European
Parliament on November 2011, supporting the French attempt to push for a reform of the inter-
national monetary systems during its G20 Presidency.60

Explaining Convergence and Divergence
The most obvious reason for transatlantic convergence on global macroeconomic imbalances are
economic parameters. The U.S. has experienced a persistent deficit in its trade balance. The cur-
rent account peaked at almost six percent in 2006. While it improved during the economic and
financial crisis in 2009 (-2.7), the deficit is on the rise again. The EU and the Euro area, on the
whole, were in external balance with 0.4 percent for the Euro area in 2006 (2009: -0.4 percent)
and -0.3 percent for the EU (2009: -0.3 percent). However, there were large differences between
individual EU members: Germany’s current account surplus amounted to 6.5 percent in 2006,
Britain’s deficit to 3.4 percent. The largest current account deficits were experienced by the peri-
phery of the Euro area, foremost Greece.

59   Die G20-Politik der kleinen Schritte, Handelsblatt, 21.2.2011.

Figure 9: Trade Deficits (trade in goods, in percent of GDP)

Sources: International Monetary Fund, World Economic Outlook Database, October 2010.

However, economic parameters alone cannot explain the transatlantic differences. Again, percep-
tions and interpretations of the causes of the imbalances play a large role. As Erik Jones pointed
out in his 2009 essay, “Shifting the Focus: The New Political Economy of Global Macroeconom-
ic Imbalances”, the debate on global macroeconomic imbalances has changed. Jones argues that
in the past it was easy to criticize net-importing countries for their lack of competitiveness and
self-discipline, while at the same time lauding net-exporting countries. Today, this is not the case
anymore. Net-exporters are not only much more closely scrutinized. As the criticism towards
Germany illustrates, they are expected to contribute to reducing the imbalances by buffering do-
mestic demand.61 The U.S. government finds the causes of the imbalances not only in competi-
tiveness or a lack thereof. According to the U.S., Germany ran large current account surpluses, as
low wage growth held down consumer demand, thereby fuelling the inner-European imbalances.
Chancellor Merkel, on the other hand, argued that “current account balances are also proof of
achievements, and they are the result of global market processes,” dismissing the U.S. criticism of
the country’s export surplus. “Our export success shows how competitive German products
Another factor are different growth models. The German government believed in export-led
growth, while criticizing the U.S. consumption-based growth model. “The American growth
model, on the other hand, is in deep crisis. The United States lived on borrowed money for too
long, inflating its financial sector unnecessarily and neglecting its small and mid-sized industrial
companies. There are many reasons for America’s problems, but they don’t include German ex-
port surpluses.”63

61 Erik Jones, “Shifting the Focus: The New Political Economy of Global Macroeconomic Imbalances,” in: Sais Review, Vol.
XXIX, No. 2 (Summer-Fall 2009).
62 “Our Export Success Shows How Competitive German Products Are,” in: Spiegel.online, 10 November 2011,

63 ”Interview With German Finance Minister Schäuble, 'The US Has Lived on Borrowed Money for Too Long'”, in: Spiegelonline,

8 November 2010,<http://www.spiegel.de/international/world/0,1518,727801,00.html>.

Figure 10: Private Final Consumption Expenditure

Source: European Commission, Ameco Database, October 2010.

Last but not least, politics are a decisive factor, at least in the Unites States. Public support of free
trade is lukewarm at best. A Pew research poll question on the impact of free trade agreements
on the country in 2010 showed that 35 percent believed that free trade agreements were a good
thing, 44 percent believed they were in fact a bad thing. The poll also showed that Republicans
and Republican-leaning independents who agree with the Tea Party have a particularly negative
view of the impact of free trade agreements.64 It does not come at a surprise that politicians anted
up their antitrade and anti-China rhetoric before the mid-term elections in November 2010.

Case Study III: Financial Regulation – Bank Levy
For more than two decades, the regulation of financial markets was the paramount example for
different varieties of capitalisms in the United States and continental Europe: liberalization and
laissez-faire on one side, regulation on the other side of the Atlantic. The financial and economic
crisis 2008/2009 put an end to this. The transatlantic partners agree that while the financial crisis
has no single cause, regulatory failures were a defining characteristic. Regulation and supervision
fell short on two major accounts: to spot systemic risks in the markets and to send out early
warnings, as well as to implement effective regulatory safeguards and setting disincentives for
excessive risk-taking behavior. The U.S. and the EU also agree that sound, transparent and pre-
dictable rules and oversight are necessary because a healthy financial sector is crucial to the entire
economy of a country.
There was considerable transatlantic convergence: When Democratic Senate Finance Chairman
Max Baucus opened the Committee’s hearing on 4 May 2010 by quoting Thomas Jefferson in
saying that “banking institutions are more dangerous […] than standing armies”65 he sounded

64 Pew Research Center, Americans Are of Two Minds on Trade. More Trade, Mostly Good; Free Trade Pacts, Not So, 9 No-
vember 2010, <http://pewresearch.org/pubs/1795/poll-free-trade-agreements-jobs-wages-economic-growth-china-japan-
65 Hearing Statement of Senator Max Baucus (D-Mont.) Regarding the Proposed Bank Tax, 4 May 2010,


almost like former German Federal President Horst Köhler, who repeatedly called the financial
markets a “monster.”66 In July 2010, Congress passed the Wall Street Reform and Consumer Pro-
tection Act (short: Dodd-Frank Act), which addresses financial regulation and oversight, closing
many regulatory loopholes, reorganizes parts of the oversight system, improves protection of
consumers and investors and deals with the problem of ‘too big to fail’. Likewise, EU members
have initiated several reforms, including an overhaul of the European financial regulatory sys-
As Mario Draghi, Governor of the Bank of Italy, emphasized in October 2010 “addressing the
‘too big to fail” problem is perhaps the most challenging remaining legacy of the crisis”.68 The
problem gained prominence in March 2008 with the controversial rescue of the investment bank
Bear Stearns by the Federal Reserve and the subsequent decision to let Lehman Brothers fail in
September 2008. ‘Too big to fail’ ( TBTF or ‘too interconnected to fail’) describes the assumption
that an institution is so large or so inter-connected with counterparties that its creditors (possibly
even shareholders) must be protected by the government, otherwise risking contagion to the
whole financial system. While TBTF is not a new problem, it was amplified by the extent of gov-
ernment’s interventions world-wide to prevent the complete collapse of the financial system. In
addition, due to consolidation during the crisis, financial institutions have become even bigger.
Morrison/Véron (2010) highlight three policy challenges presented by TBTF: 1. It removes the
incentives to prudently manage risks and creates massive liabilities for governments which can
endanger the financial sustainability of states as has been illustrated dramatically by the crises in
Iceland (2008-2009) and Ireland (2009); 2. it distorts competition through higher credit ratings
for large financial institution through implicit government guarantees; 3. the treatment of TBTF
institutions undermines the public’s trust in the fairness of the system. The two authors also high-
light several policy options how to deal with TBTF: capital and liquidity surcharges, size related
taxes and levies, competition policy, and size caps.69
While the transatlantic partners agree that the TBTF problem needs to be addressed, they differ
with regard to the preferred policy option. One of these divergences is on a bank levy as an in-
strument to reduce excessive risk taking behavior in the financial sector and to recover the costs
of the financial crisis. At the G20 summit in Pittsburgh, the leaders asked the IMF to: “[…] pre-
pare a report for our next meeting [June 2010] with regard to the range of options countries have
adopted or are considering as to how the financial sector could make a fair and substantial con-
tribution toward paying for any burden associated with government interventions to repair the
banking system.”70 In response, the IMF proposed two bank taxes in late April 2010. Under the
Financial Stability Contribution, all institutions would initially pay a flat-rate bank levy. Over time,
this “backward-looking” fee was to become more “forward-looking” by reflecting riskiness and
systemicness, meaning that those who pose a greater danger to the financial system should also

66 „Köhler bezeichnet Finanzmärkte als ‚Monster‘“, in: Spiegelonline.de, 14 Mai 2010,

67 Steffen Kern, US Financial Market Reform. The Economics of the Frank-Dodd Act, EU Monitor 77, Deutsche Bank Research, 28

September 2010.
68 Mario Draghi, Key Note at the Peterson Institute for International Economics – Bruegel Conference on The Transatlantic Relationship in an Era of

Growing Economic Multipolarity, Washington, D.C. 8 October 2010.
69 Morris Goldstein/ Nicolas Véron, Too Big to Fail: The Transatlantic Debate, Bruegel Working Paper 2011/3, 2011, p. 3-4, 21.
70 Leader’s Statement. The Pittsburgh Summit, 24-25 September 2010,


pay more. The proceeds of this levy could either finance a resolution fund or feed into general
revenues. The Financial Activities Tax would be levied on the profits of financial institutions.71
However, the G20 countries were not able to find a consensus on whether or not a financial in-
stitution tax was an appropriate element of regulatory reform at their meeting on 23 April 2010.
The G20 only called upon the IMF to “further work on options to ensure domestic financial
institutions bear the burden of any extraordinary government interventions where they occur.”72
Not only were the leaders of Canada, Australia and Japan, China, India and Brazil decidedly op-
posed to a bank fee.73 While the Obama administration and the Merkel government agreed that
financial institutions should be held responsible, paying their due share in getting the economy
(and public finance) back on its feet, there were considerable differences in their approaches. As
so often, the devil lay in the detail.

The U.S. Case
On January 14, 2010, the Obama administration proposed a Financial Crisis Responsibility Fee (FCR)
to recover intervention costs incurred during the financial crisis under the $700 billion Troubled
Assets Relief Program (TARP). The fee was to be in place for ten years, longer if necessary, until
the costs of TARP were fully recovered. This fee was thus decidedly backward-looking. Only the
largest firms (banks, thrifts, insurance companies, and U.S. holding companies of those entities)
with assets of more than $50 billion and that profited from TARP would have been subject to an
annual levy. U.S. companies would be taxed based on their worldwide consolidated assets, for-
eign entities only on their U.S. assets. Covered liabilities would have to be reported by regulators,
the fee would be collected by the IRS, and revenues would be used to reduce the federal budget
deficit.74 About 60 entities would have qualified for taxation under the FCR, according to the
Treasury, thus 99 percent of the banking sector would have been unaffected. Treasury Secretary
Geithner wanted to achieve two goals with the fee: putting a premium on risk-taking behavior
and reducing the government deficit. The FCR fee was estimated to raise $90 billion over a 10 to
12 year period. Contrary to the IMF’s proposal, the administration did not propose a rainy day
fund for future financial crises. The administration feared that such a fund could amplify the “too
big to fail” problem and promote rather than prevent taxpayer bailouts of failed financial institu-
tions (moral hazard).
The administration’s proposal ran into strong opposition from lawmakers, particularly Republi-
cans.75 Backed by the financial industry, their arguments were threefold. Their first criticism con-
cerned the timing of the measure. The legislation that created TARP, the Emergency Economic
Stabilization Act of 2008 (EESA), calls on the president to put forward a plan “that recoups from
the financial industry an amount equal to the shortfall in order to ensure that the Troubled Asset
Relief Program does not add to the deficit or national debt” by 2013. Opponents to the tax ar-

71 IMF, A Fair and Substantial Contribution by the Financial Sector, Interim Report for the G-20, 16 April 2010,

72 Communiqué. Meeting of Finance Ministers and Central Bank Governors,

23 April 2010, <http://www.g20.org/Documents/201004_communique_WashingtonDC.pdf>.
73 The President’s Proposed Fee on Financial Institutions Regarding TARP: Part 3, 11 May 2010, <http://finance.senate.gov/hearings/>.
74 The White House, Financial Crisis Responsibility Fee, 7 May 2010, <http://www.whitehouse.gov/the-press-office/president-

75 The President’s Proposed Fee on Financial Institutions Regarding TARP: Part 2, Senate Finance Hearing, 4 May 2010,


gued that the full costs of TARP could not yet be measured sufficiently and that the fee would
just be a “stab in the dark,” as Democratic Senator Maria Cantwell put it.76 A second criticism
targeted the fairness of the measure. Some institutions that contributed to the financial crisis and
benefited considerably from the government’s rescues, like the two mortgage companies Fannie
Mae and Freddie Mac, were not to be subjected to the levy. A third issue that concerned policy-
makers, Democrats and Republicans alike, was the effect of the fee on small business lending and
the still fragile economic recovery. Financial institutions warned that they might be forced to pass
their costs along to the consumer. In this case, not the companies but their employees and/or
shareholders would have to bear the cost of the tax. In addition, credits could become more ex-
pensive and less available.
While the Treasury Secretary eloquently lobbied for the administration’s proposal, skepticism
remained strong. In the end, the proposal was removed from the financial regulatory overhaul bill,
the Wall Street Reform and Consumer Protection Act. Only days before the final vote, it became
apparent that the bill would not be approved, particularly by the Senate, unless the bank levy was
taken out. To get the ambitious Frank-Dodd Act passed, the Obama administration needed to
make a compromise with Republicans, who strongly opposed the bill. 60 votes are necessary to
make a proposal filibuster proof. Not only did the Democrats not have this majority, it was also
clear that not all of them would vote for the proposals. To win over the necessary Republicans to
secure the bill’s passage, the Obama administration sacrificed the bank levy.
Mid-February 2011, the Obama administration re-tabled the Financial Crisis Responsibility Fee,
albeit dramatically curtailed in its scope. Under the new plan, the bank levy would collect $30
billion over 10 years to recoup the costs of bailing out troubled financial institutions during the
financial crisis. The fee would be applied to banks and financial firms with consolidated assets
over $50 billion and charge fees of 0.075 percent a large financial firm’s covered liabilities. i.e. its
risk-weighted assets minus capital, insured deposits and certain small business loans. The propos-
al was part of Obama’s 2012 fiscal budget plan. According to the Treasury Department said “the
financial crisis responsibility fee is intended to recoup the costs of the TARP program as well as
discourage excessive risk-taking, as the combination of high levels of risky assets and less stable
sources of funding were key contributors to the financial crisis.”77

The European Case
On October 15-16, 2008, EU leaders agreed at a Council meeting to take all necessary steps to
preserve the stability of the financial system and support major financial institutions, while em-
phasizing that these measures should go hand in hand with measures to protect tax payers. Ac-
cordingly, the EU also discussed a bank levy to recoup the costs of the financial crisis and to curb
excessive risk taking behavior. But while competencies on financial regulation are shared between
the national and the EU level, the power over tax legislation is almost entirely national. The Eu-
ropean Commission proposed to create a European Bank Resolution Fund in May 2010.78 The

77 Quoted in: “Obama Floats $30 Billion Bank Tax as TARP Costs Shrink”, in: Reuters, 14 February, 2011,

78 Communication from the Commission to the European Parliament, the Council, the European Social and Economic Committee and the European

Central Bank, Bank Resolution Fund, Brussels, 26.5.2010 COM(2010) 254 final, 26 June 2010,

proposed fee, which would be shouldered largely by 15 big listed banks in Europe, is thus for-
ward-oriented rather than making ex-post payments. But the Commission also concedes the risk
of moral hazard, if a rainy-day-fund for future bank collapses was introduced. It therefore em-
phasized that “resolution funds must not be used as an insurance against failure or to bail out
failing banks, but rather to facilitate an orderly failure”.79
Some member states are supportive of a European solution for bank rescues. For instance France
pushed for a European Bank rescue fund during its European Council Presidency in the second
half of 2008. But it is unlikely that the Commission proposal will be adopted. Differing roles of
the banking sectors in the national economies and diverging financing needs of the banks make it
unlikely that a common stance is found – even for the 17 Eurozone member states. Some mem-
ber states whose banking sectors do not face important recapitalization or restructuring needs,
refuse to share in the costs of other member states by creating a pan-European solution. The
feasible option is hence be the introduction of national bank levies – albeit with a certain degree
of coordination, not only on taxation levels and the actual tax base, but most importantly to
avoid double taxation.
German finance minister Wolfgang Schäuble announced a legislative proposal to improve the
country’s ability to deal with failing financial institutions at the end of March 2010. Unlike in the
United States, the systemic risk adjustment levy was very much more “forward oriented.” While
all banks would be subject to the fee, its amount would vary according to the systemic risk an
individual bank posed to the financial system. Systemic risk would be determined on the basis of
the size of bank’s liabilities (excluding capital and deposits) and its interconnectedness with other
financial market participants, among other factors. Thus, according to the government’s initial
proposal, banks with a higher systemic risk would have to pay more than, for example, credit
unions and savings banks.80
The levy was designed to be a corrective on financial institution’s behavior. The receipts are to
feed into a stability fund to finance the restructuring and resolution of systemically relevant banks
in the future. This would entail that financial supervisors obtain expanded powers to intervene in
banks. The fund and the resolution mechanism would be supervised and managed by the Federal
Agency for Financial-Market Stabilization (Bundesanstalt für Finanzmarktstabilisierung, FMSA),
created in 2008.81 The government also discussed a tax on international financial transactions.
As in the U.S., the bank fee was not meet with sympathy everywhere, but partly for different rea-
sons. In Germany, the Social Democratic Party (SPD) called for a more radical approach such as
a financial transaction tax and stricter regulation. Sigmar Gabriel, leader of the SPD, warned
about the effects on small and medium business lending. The Left Party criticized the tax as win-
dow dressing and political bait for the state elections in North Rhine-Westphalia. Also members
of the Wirtschaftsweisen Rat, a council similar to the U.S. Council of Economic Advisors, were

79 Quoted in: “EU Proposes ‘Preventive’ Bank Levy”, in: Euractiv, 26 May 2010, <http://www.euractiv.com/en/financial-

80 Bundesregierung, Banks to Make Provisions for Future Crises, <http://www.bundesregierung.de> (accessed: 8 May 2010); Bunde-

sregierung, Bank Levy – Making Provision for Risis at International Level, <http://www.bundesregierung.de> (accessed: 8 May 2010);
Freshfields, Bruckhaus, Deringer, The German Bank Levy, Briefing July 2010,
81 Bundesministerium der Finanzen, Eckpunktepapier: Krisen vermeiden, Banken beteiligen, 31 March 2010,

Finanzmarktregulierung.html>; IMF, A Fair and Substantial Contribution by the Financial Sector, Interim Report for the G-20, 16 April
2010, <http://news.bbc.co.uk/1/shared/bsp/hi/pdfs/2010_04_20_imf_g20_interim_report.pdf>.

skeptical about the tax.82 Former Bundesbank President Axel Weber conceded, the levy could be
used to making banks contribute to cost sharing. However, in comparison to capital requirements,
it was less well equipped to reduce risk taking behavior.83 Unlike in the U.S., however, opposition
from the financial sector was not quite as strong. The Association of German Banks, which
represents private sector banks including Deutsche Bank AG and Commerzbank AG, supported
a privately financed, state-controlled stabilization fund that could intervene to rescue or wind up
troubled lenders.84 The Federation of German Industries (BDI) also agreed that it was legitimate
for the government to seek to involve banks in the costs of saving and stabilizing financial insti-
tutions, if questions concerning the extent of the fee, its base, and its target were addressed and
the design ensured that it would not worsen credit conditions for the real economy.85
The Reconstruction Fund Act (Restrukturierungsgesetz) was passed in fall 2010; the Act came
into force on 1 January 2011. It sets up a new restructuring fund (Restrukturierungsfonds) with a
target size of € 70 billion, financed by a bank levy. Banks are expected to pay a minimum of 5
percent and a maximum of 15 percent of their profits into the fund. Early 2011, the debate about
the bank fee has heated up again as details about its implementation were announced, suggesting
that a cap on the annual charge may not fully apply. Finance minister Schäuble proposed that
banks whose payment requirements went beyond the 15 percent benchmark on year should pay
their dues in subsequent years. The financial sector strongly opposed this notion.
Several other EU member states, such as France, Great Britain, Sweden, Austria and Hungary to
name just a few, have individually introduced national bank levies. Unlike Germany, for instance
France, Sweden and Hungary opted for models, in which bank levy revenue is not put into a re-
structuring fund, but directly flows into the state budget. The choice may reflect, among other
factors, firstly, differing perceptions of actual support the banking sector may need, and secondly
different degrees of political willingness and acceptability to jump in for banking institutions. In
France, with a rather strong tradition of state interventionism, it is less problematic to intervene
in the financial sectors with big sums of public money directly from the budget, if a “national
emergency case” can be argued politically. Meanwhile, in Germany, the need to show that the tax
payer it not always the “cash cow” seems to be comparatively higher and a restructuring fund
which is financed by the banks themselves provides transparency.
One of the remaining political challenges for the EMU member states is the need to improve
cross-border agreements on the implementation of national bank levies. From the point of view
of the banking sector, the key task is to avoid double taxation, as some of the if the tax is applied
to total assets. This means that activities of a certain bank in other states are also subject to the

82 „Sparkassen und SPD kritisieren Bankenabgabe“, in: Weltonline 22 March 2010,
83 Bundesbank/Weber sieht geplante Bankenabgabe mit Skepsis, 5 May 2010,

84„A Stability and Resolution Fund for a Robust Financial Market,” Bundesverband Deutscher Banken, DeFacto, April 2010,

85 Quoted in: “Germany's New Bank Fee Will Pay for Future Bailouts”, in: Huffington Post, 22 March 2010.

Explaining Cooperation and Divergence
The financial sectors of both the United States and the EU member countries have been severely
hit by the financial crisis 2007-2009. Our first explanatory factor, the economic situation, thus
does not suffice in accounting for the transatlantic divergence on the bank levy. Rather, percep-
tions and historical experiences help us better understand the countries differing preferences.
Goldstein/ Véron (2010) offer a compelling explanation. They argue that European countries are
more inclined to rescue failing banks than the United States. In many European countries, fore-
most Germany, bank failures are perceived not only as economic challenge but as political disas-
ters. The memory of the last significant wave of bank failures in 1931 still weights heavily on the
policymaker’s minds as it enabled the rise of the National Socialists in Germany.
There is another reason why European governments have a preference for bank rescues: Histori-
cally, governments have encouraged the development of a strong financial sector to be competi-
tive vis-á-vis their neighbors. In the U.S., the experience is a different one. Historically, the U.S. is
much more critical of the power of large banks, and many laws have curtailed the ability of banks
to grow too large, in particular the Glass Steagall Act of 1930. The U.S. is also much more com-
fortable with letting large banks fail. The reason for this also lies in the structure of the financial
market: Banks in the U.S. are less taxed with the intermediary function than their European com-
So what has this to do with the bank levy? Accepting the necessity of bank rescues during crises
to ensure not only economic but also political stability, the question who eventually bears the
costs becomes paramount in countries like Germany. Not to unfairly burden the tax payer, the
financial sector needs to be ‘bailed-in’. In the U.S., where there is greater acceptance of letting
banks fail, rules and regulation how to facilitate an orderly unwinding of failing financial institu-
tion becomes important.
Last but not least, politics and special interests played a large role. In the U.S., the proposal ran
into stiff opposition by a still powerful financial sector. A good indicator for the role special in-
terest groups played during the financial reform efforts are campaign contributions. The Center
for Public Integrity showed how financial sector political action committees (PACs) switched
from largely supporting the Democrats during the 2008 election cycle to the Republicans. The
Center examined 1.300 political action committees that gave at least 300.000 over the 2008 and
2010 election cycles. They identified 50 committees whose bipartisan contributions shifted dra-
matically from Democrats to Republicans of which 13 represented financial sector interests.
While this sector gave only 44 percent to Republicans during the 2008 election cycle, contribu-
tions to Republicans went up considerably after the House passed the Dodd-Frank Act in De-
cember 2009. The Center found that contributions went up a second time after the Senate passed
the bill in July 2010. By the end of the election cycle 2010, 65 percent of the contributions these
PACs went to Republicans. The National Association of Mortgage Brokers (NAMB) is a good
illustration of this. While they gave 57 percent of their contributions to Republicans in 2008, this
figure jumped up to more than 88 percent in 2010.86

86 Josh Israel/ Aaron Mehta/ Elizabeth Lucas, Scared Red: The PACs that Followed the Nation Rightward in 2010, 1 March 2011,


In the EU, politics also explain part of the dynamics that have led to the introduction of bank
levies in some member states. In the political debate, for instance in Germany, there has been a
clear link to the sovereign debt crisis. As this crisis is widely acknowledged as not only being a
problem of unsound budgetary policies, but rather (as for example the Irish case clearly depicts) a
problem of the banking sector, the question is raised for which purposes tax payers’ money is
actually used. This is a particularly delicate question if rescue mechanisms are constructed to sta-
bilize other member states – while the perception is that rescue mechanisms have actually been
put in place to save the own or another member states’ banks.

Case Study IV: Regulatory Cooperation
Despite many attempts to eliminate non-tariff barriers in transatlantic trade (NTBs), business still
suffers from the complexity and costs of having to comply with different regulatory regimes.
Contrary to average customs duties which average less than four percent – with the exception of
some areas with high import tariffs, such as trade in agriculture and textiles – NTBs continued to
seriously hamper transatlantic trade. Furthermore, the reduction of these barriers and improved
market access would result in tangible welfare gains for both partners as the study Non-Tariff
Measures in EU-U.S. Trade and Investment – An Economic Analysis shows. The U.S. and the EU agree
that deeper transatlantic integration offers considerable welfare gains. They also agree that the
focus must lie on the removal of non-tariff barriers. Last, they are both of the opinion that a Free
Trade Area (FTA) as currently negotiated between Canada and the EU is not desirable. Not only
are tariffs already quite low. The EU and the U.S. are fearful of the signal such a ‘trading bloc’
might send to their other trading partners.
When the EU and the U.S. agreed on the Framework for Advancing Transatlantic Economic
Integration87 at the EU-U.S. Summit on April 30, 2007, many observers thus hoped for a new era
in transatlantic regulatory cooperation.88 Its goal is to deepen transatlantic economic integration
by eliminating NTBs posed by regulations such as norms and standards. Knowing from experi-
ence that this would not be feasible without continuous political support and cooperation beyond
the annual summits, the transatlantic partners created the Transatlantic Economic Council (TEC)
to steer and evaluate regulatory cooperation as well as to prevent and mitigate trade conflicts. As
part of the 2007 initiative, the two trading partners also agreed on several lighthouse priorities
projects including mutual recognition of financial market regulations, enhanced protection of
intellectual property rights (particularly in third markets), development of common standards
regarding secure trade, and the establishment of a regular dialog on investment barriers.
The new initiative took off with a good start: the EU and U.S. signed a first-stage Air Transport
Agreement (Open Skies). Progress was also made with regard to reconciling the differences be-
tween accounting standards. Additionally, the TEC established a road map for reaching mutual
recognition of U.S. and EU Customs-Trade partnership programs (referring to border security
measures adopted in both regions) by 2009. However, after this hopeful beginning, subsequent
meetings of the TEC achieved little concrete results. What’s more, many frictions persisted, such

87 Framework for Advancing Transatlantic Economic Integration between the European Union and the United States of America, April 2007,
<http://ec.europa.eu/external_relations/us/sum04_07/framework_transatlantic_ economic_integration.pdf>.
88 European Commission, DG Enterprise and Industry, Transatlantic Cooperation Enters New Era, October 9, 2007


as on the U.S. legislation requiring 100% scanning of containers bound for U.S. ports. Most of all,
the second TEC meeting in Brussels as well as the following EU-U.S. summit in Brodo, Slovenia,
were overshadowed by a serious conflict over poultry, which was declared a litmus test for trans-
atlantic economic relations by then USTR Susan Schwab.
In order to overcome this deadlock, both partners are increasingly looking for ways to promote
more effective regulation focusing on prospective regulation rather than tackling existing prob-
lematic cases – so-called “upstream” regulatory approach. An innovative and promising example
is the Project on Emerging Nanotechnologies, which was initiated at the 2007 EU-U.S. summit
and aims at transatlantic regulatory cooperation in the early stages of the new technology.89 At the
latest meeting of the TEC in December 2010, the transatlantic partners restated the need to en-
sure early coordination on related regulatory activities to avoid unintended barriers to trade. Each
side agreed to shared principles, including transparency, public participation, consideration of
costs and benefits, cost-effectiveness, burden minimisation, and use of flexible regulatory tools.
The partners also agreed on a timeframe in which they planned to advance the regulatory

The U.S. Case
President George W. Bush was a strong supporter of the new transatlantic initiative. However, he
quickly became disillusioned with the slow progress under the TEC. Particularly irritating from
the U.S. point of view was the poultry case. At the heart of the debate lay an eleven year old Eu-
ropean ban on U.S. poultry meat. The ban addressed the use of chlorinated water as a deconta-
minant by U.S. farmers – a practice which is prohibited in the EU due to consumer protection.
The ban is negligible in terms of overall trade values. But given that neither U.S. nor European
scientists could back any health or environment concerns, the U.S. side regarded the ban a pro-
tectionist move and a violation of international trade law. For the U.S. it was representative for
the many trade disputes which involve the EU’s precautionary principle such as hormone treated
beef and genetically modified organisms and thus a litmus test for the new transatlantic initiative.
USTR Susan Schwab argued: “The poultry issue is one that has been of significant concern, both
in its actual facts and its symbolic importance in terms of our ability to resolve transatlantic trade
President Bush invested considerably more political capital in the negotiations of free trade
agreements. He signed bilateral FTAs with 11 countries (three of them are still pending) and one
plurilateral FTA with the Central American countries. In 2008, with the showdown of the finan-
cial crisis, the transatlantic initiative moved to the background. This did not change after Obama
moved into the White House. Quite the contrary, trade in general was not a priority issue during
the first year of his administration as other issues. In his second year, Obama started to develop a
greater interest in trade – but not enough to seriously revitalize the transatlantic regulatory agenda.

89 The Project on Emerging Nanotechnologies, European Commission Gives Grant to Investigate Transatlantic Oversight of Nanotechnology,
February 6, 2008, http://www.nanotechproject.org/news/archive/european_commission_gives_grant_to/.
90 U.S.-EU Transatlantic Economic Council. Joint Statement, 17 December 2010, Washington D.C.

91 Quoted in: William Schomberg, “EU Expects U.S. to Turn to WTO in Poultry Dispute,” in: Reuters UK, 6 June 2008,


Insufficient political ownership was already a problem during earlier transatlantic initiatives.
Without political commitment at the highest level, however, deeper integration is not impossible.

The EU Case
The greatest driver of transatlantic integration in the EU is Germany. On 1 January 2007, Chan-
cellor Merkel took over the six-months rotating Council Presidency of the European Union. The
initiative for a transatlantic market place came directly from the Chancellery and was driven at the
highest political level from fall 2006. Speaking to the European Parliament’s trade committee,
Joachim Wuermeling, State Secretary in the BMWi, said in January 2007: “What we are striving
for […] are improvements in non-tariff barriers. Closer economic co-operation would, for exam-
ple, be more than worthwhile in regard to the protection of intellectual property, energy and the
environment, as well as financial markets, regulations and standards.”92 At the World Economic
Forum in Davos, the Chancellor called for a transatlantic economic area, which “isn’t intended to
be contrary to, but rather to supplement and support, the multilateral approach.” 93 Merkel
wanted a comprehensive agreement that, in addition to removing tariff barriers, would include
technical standards, the integration of financial and capital markets, questions of competition law,
investment, environment, and energy policy, among other areas. This idea was strongly supported
by the German business community, which, more vocally than ever before, called for a break-
through in reciprocal market deregulation.
However, with the begin of the financial crisis, the transatlantic initiative moved down in
Merkel’s list of priorities in particular as it did not yield the hoped for economic benefits. Fur-
thermore, there were several contentious issues from the German and European point of view,
one of them being the 100% scanning initiative. Subsequent to the terrorist attacks of 11 Sep-
tember 2001, the U.S. stepped up its security measures in aviation and shipment. In mid-2007,
President George W. Bush signed the 9/11 Commission Recommendations Act. The U.S. law,
which addresses the threat to border security and global trade posed by the potential for terrorist
use of a maritime container, mandates that all U.S.-bound containers must be scanned 100 per-
cent at port of shipment starting 1 July 2012 at the latest. It particularly targets ports, regarded as
an especially weak element of the U.S. security system. The European Commission conducted
three studies on the impact of the U.S. legislation requiring 100 percent scanning on EU customs,
transport, and trade. These studies confirm that the legislation would create a disproportionate
economic burden without proven benefits for security.

Explaining Cooperation and Divergence
The Council’s limited success can be attributed to a variety of factors: To some extent, there are
severe difficulties in establishing reciprocity in negotiations as well as a lack of appropriate meth-
odologies for assessing the adverse impact of regulations on industry. Yet, more importantly,

92 Joachim Wuermeling, Trade Policy under Germany's Council Presidency, 1st Meeting of the INTA (Trade) Committee of the Euro-
pean Parliament, 23 January 2007.
93 “Opening address by Federal Chancellor Angela Merkel at the World Economic Forum in Davos,” 24 January 2007,


harmonization or mutual recognition of standards and regulations requires complex legislative
changes in an often highly politicised policy environment.
In the areas of food safety, environment and security both partners operate with starkly different
regulatory philosophies and styles in a highly politicised policy environment. At the heart of these
differences lie strongly diverging risk perceptions. Whether the EU or the U.S. is the more pre-
cautionary actor depends clearly on the particular issue. The U.S., for instance, is more precau-
tionary when it comes to national security. The European counterpart, on the other hand, has
become a much more risk-averse actor in the areas of food safety and the environment, such as
with poultry meat or chemicals. When faced with uncertainties about the risks of these products,
European regulators are much more willing to take precautionary measures than their American
counterparts. 94 Thus, they seek to give more weight to risk avoidance over cost/risk-benefit
analysis and to public preferences over scientific risk assessments. Vice versa, the U.S. administra-
tion opposes references to precaution and socio-economic impact analysis in these areas. Accord-
ing to the common credo “Don’t fix what’s not broken”, U.S. regulation is rather motivated by
the amelioration of market failures. Consumer protection thereby is achieved by a punitive ap-
proach. Based on principles of legal liabilities, known as “torts”, violators of basic health or envi-
ronmental protections must provide financial compensation to the victims. Thus, the argument
goes, these powerful legal disincentives make government regulatory action unnecessary. Justice
is exercised after the damage has been done.
The European approach of preventing harm before it happens and regulating even in the face of
uncertainty is, from a U.S. point of view, often seen a guise for protectionist measures and an
obstacle to regulatory cooperation in itself. According to this view, leaving the final assessment to
legislative bodies opens the door for politicised decisions and, consequently, bad regulation. In
the U.S., it is therefore independent regulatory agencies that are in charge not only of risk as-
sessment – based on sound science and cost-benefit analysis – but also risk management.
Nonetheless, equally difficult to reconcile are differences stemming from varying foreign policy
goals and national security preferences. Unlike in the case of consumer protection, it is here the
U.S., which takes the more precautionary approach – at least since the terrorist attacks of 9/11.
An example is Congress’ veto to fully open up the voting stock of U.S. airlines to foreign owner-
Another obstacle to bilateral regulatory cooperation is the involvement of a multitude of inde-
pendent regulatory agencies in EU-U.S. negotiations. In the U.S., for the most part, rule-making
at the federal level is performed by agencies according to a delegation of power from Congress
through enabling legislation (“administrative rule-making”). Agencies such as the Food and Drug
Administration (FDA) or the Environmental Protection Agency (EPA), however, often operate
under a mandate with focus on the domestic market only. To get these agencies involved in in-
ternational trade affairs is politically difficult to achieve and often requires intervention by Con-
gress. To complicate matters further, the U.S. and the EU also approach the drafting and imple-
mentation of regulation differently, reflecting varying governmental structures and administrative
traditions. While the EU generally relies on a more “prescriptive” approach to regulation, by
which its regulators inform industry exactly how it can conform to rules, the U.S. depends on a

94 David Vogel, The Hare and the Tortoise Revisited: The New Politics of Consumer and Environmental

Regulation in Europe, British Journal of Political Science Vol. 33, Part 4, October 2003.

more “outcome-driven” approach, by which regulators specify certain performance requirements
while granting industry considerable latitude in how to achieve them. Yet, the biggest obstacle for
reconciling these differences in regulatory philosophies is that both sides view their approach as
the better one. “We obviously believe that our regulatory approach works better in the long run
because it tends to produce more flexible outcomes based on more appropriate risk management
analyses. These outcomes, in turn, are better able to adjust and adapt to changing technologies
and levels of knowledge,” stated Charles P. Ries, Principal Deputy Assistant Secretary for Euro-
pean and Eurasian Affairs in a hearing before the U.S. Senate.95
Last but not least, given the dynamic EU-China and U.S.-China trade, it is not very surprising
that the transatlantic partners look increasingly towards China.

Figure 11: Export Growth in Percent

Source: IMF, Direction of Trade Statistics, March 2010.

Transatlantic convergence and divergence, cooperation and conflict are driven by a potpourri of
factors: economic and financial realities, perceptions and historical experiences, ideas and ideolo-
gies, institutional and structural constraints, and politics (such as election cycles). Their weight
varies within the different policy-areas. The analysis of immediate crisis management and fiscal
policies as well as of macroeconomic rebalancing in particular underlines the importance of dif-
ferent economic starting points: differences in growth models (domestic consumption versus
export-orientation), saving rates and unemployment to name just a few indicators. In all cases we
found that perceptions and interpretation of the problems as well as historical experience played
a large role. How important ideas are is clearly shown within the analysis of the bank levy.
The dividing line does not in all cases run through the Atlantic, but also right through the EU,
which can be explained by different growth models prevailing in the EU, but is also due to tradi-
tions in economic thinking and other factors. European governments face a particular challenge

95 Charles P. Ries, Principal Deputy Assistant Secretary for European and Eurasian Affairs, U.S.-EU Cooperation on Regulatory

Affairs, Testimony Before the Senate Foreign Relations Committee Subcommittee on European Affairs October 16, 2003,

at the moment as they are in the midst of negotiating substantial reforms to the European eco-
nomic governance framework. Five of the 27 plus the Council and the Commission Presidents
are also involved in the G20 negotiations. The negotiations on these two levels may sometimes
complicate matters, as for instance Germany could not agree to more scrutiny of external surplus
countries in the G20 context – as it has a clear preference to prevent a symmetric approach to
macro-economic policy coordination in the EU.
If the European negotiations succeed and the EU does indeed grow closer together economically
and politically, over time some of the current divergences in positions of the EU member states
that emerge in external relations will at least to a certain degree be leveled out. This could then
make the EU a more homogeneous actor in international fora such as the G20 and in relation-
ships with its major partners, including the United States.
The analysis of these four policy fields in a rather shows a snapshot of transatlantic relations. We
cannot rule out that with changing economic conditions and public pressure, it will again come to
more convergence. For instance, the sheer size of the budget deficit in the U.S. makes fiscal con-
solidation inevitable. In the case of Germany, pressure by fellow EU members and some political
parties who link their claims such as minimum wages to the debate over imbalances, but also due
to the growing insight that it may be in Germany’s self interest to find a reasonable growth pers-
pective without assuming it will run high external surpluses in the long-run, might induce a subtle
readjustment of its growth strategy.
The period from 2007 to 2011, which we investigated, is arguably short. But it is a key period for
all actors involved, as it combines elements of crisis management and governance reforms, with
the latter drawing conclusions from the crisis for the future. Hence, while e.g. budgetary and eco-
nomic policies may be adjusted within a rather short time horizon, the governance framework
that is currently being amended or set both in the US, in the EU member states, on the EU level
and within the G20, is here to stay for some time. Governance in the EU and, to a stronger de-
gree on the G20 level, crucially depends on cooperative behavior of the member states. Domestic
politics and policies will crucially determine in how far the mechanisms now invented or adjusted
will have a beneficial impact. The US and the EU and its member states will remain key partners
in tackling the current and future transatlantic and global key policy challenges. We feel rather
safe to predict that the transatlantic policy agenda will remain full of important issues. But only
thorough knowledge of the partners domestic constraints, a far-sighted assessment of the bene-
fits of cooperative behavior and a joint strategy in the global fora will allow for substantial

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