G8 Leaders Prepare to Team Up on Germany’s Merkel

Other industrialized nations have grown weary of austerity. The German chancellor finds herself without allies at Camp David.

German chancellor Angela Merkel will likely be isolated among G8 leaders in Camp David this weekend. With the possible exception of Canada’s Stephen Harper, the leaders of the world’s other major industrial nations are all growing weary of austerity.

The divide is a familiar one. American president Barack Obama has urged his overseas counterparts to do more to stimulate economic recovery in the eurozone for two years while the Germans are adamantly opposed to more deficit spending as well as an expansionary monetary policy as has been pursued in the United States.

Treasury Secretary Timothy Geithner lamented Europe’s “negative spiral of growth killing austerity” this week. The German finance minister, Wolfgang Schäuble, was exasperated. “One cannot now seriously demand taking on even more debt to solve the crisis,” he told Focus magazine earlier in the month.

The Germans regard America’s nearly $1 trillion stimulus program with disbelief and insist that Europe’s approach should be different. Solid public finances, they say, is a key condition for consumer and investor confidence and therefore growth.

Transatlantic discord over austerity has become a recurring theme at international summits. President Obama urged Europe to do more stimulus at the G20 summit held in Toronto, Canada in 2010 and reiterated that call in Seoul the next year. The Germans opposed him both times and were able to sway other major powers their way.

In Toronto, the G20 countries agreed to cut their deficits in half by 2013, a targets which the Americans are almost certain to miss. Nations failed to reach agreement on monetary policy however. China and Germany remain critical of America’s willingness to print money, even if the European Central Bank has since done the same to finance Italian and Spanish deficit spending.

The difference for Merkel this weekend is that she has lost two allies. France’s Nicolas Sarkozy was replaced by socialist François Hollande this week who brings with him an agenda for “growth” (which means more public spending) while British prime minister David Cameron is now in favor of issuing eurobonds or joint sovereign debt paper in the eurozone — so the United Kingdom wouldn’t have to participate.

The German high court preempted this proposal in September of last year when it decreed that parliament would have to consent to such a joint issuance of bonds. It is unlikely to. The Germans fear “transfer union,” the permanent bailing out of weaker states in the single-currency union at Germany’s expensive if they’re able to free ride on Germany’s pristine creditworthiness.

Merkel is no stranger to isolation. She has few allies among Europe’s leaders. Italy’s Mario Monti and Spain’s Mariano Rajoy, both conservative prime ministers, try to reduce their deficits and introduce market reforms to make their nations more competitive relative to Germany — as Merkel put it in Seoul two years ago, “the benchmark has to be the countries that have been most competitive, not to reduce to the lowest common denominator” — but they also support a more expansionary monetary policy on the part of the European Central Banks which the German chancellor rejects for fear of inflation.

It may be convenient for the Germans if China were finally let into the G8. Until that happens, Merkel will stand her ground, alone.