Policy Briefs IN INTERNATIONAL ECONOMICS Number PB06 1 JANUARY 2006 The United States Needs German Economic Leadership Ad a m S Po s e n Adam S Posen has been a senior fellow at the Institute for International Economics since 1997 This policy brief is based on his forthcoming book Reform in a Rich Country Germany He is grateful to C Fred Bergsten Daniel Gould Edward Graham Jacob Kirkegaard and Jeffrey Schott for helpful comments A condensed version of this brief was published in the Frankfurter Allgemeine Zeitung in German on January 3 2006 Institute for International Economics All rights reserved On January 13 Germany s new chancellor Angela Merkel will have her first official visit with US President George W Bush Washington or at least the part of Washington that still pays attention to transatlantic issues not just the Bush administration will be glad to see her given that she is not her US bashing predecessor Gerhard Schroeder Though this change in atmosphere is welcome no one should make too much of it It is unlikely to make much difference on security issues where Iran s own actions are forcing the United States and Germany to come together where German public opinion will keep the governments apart on Iraq and where neither country is prepared to make major changes to defense budgets and approaches The Masri case will certainly limit Merkel s interest in appearing too chummy with Bush on security matters Where Chancellor Merkel will find several opportunities to take a new and constructive tack is on transatlantic economic relations German American foreign policy tensions over the Khalid el Masri a German national was forcibly transported by the CIA from Macedonia to an Afghan prison by acknowledged mistake as part of the US rendition of terrorists This became a cause c l bre in Germany and throughout western Europe and dominated press coverage of US Secretary of State Condoleezza Rice s meetings with Merkel in Berlin in December 2005 1 7 5 0 T e l M a s s a c h u s e t t s 2 0 2 3 2 8 9 0 0 0 A v e n u e F a x N W 2 0 2 Iraq war indeed have failed to spill over into the economic sphere consistent with the pattern of most of the postwar period Underneath this amity however remain several real and troubling economic challenges that only explicit intergovernmental action can resolve The lack of policy actions to address these challenges in recent years let alone of direct cooperation between the German and American governments to deal with them more fundamentally has created a situation where the United States urgently needs Germany s help in the form of economic leadership All these issues concern Germany s role in guiding the European Union toward more liberal stances and greater economic engagement beyond EU borders With the United Kingdom having squandered its six months in the rotating EU presidency and in fact having alienated some of the more promarket newer member states of eastern Europe over the EU budget the need for Germany to speak up on economics within Europe is more dire than ever Its capability to do so has been enhanced with Merkel having resolved this year s EU budget crisis through her deft diplomacy upon taking office Ironically as Germany has emphasized its relationships within Europe it has shown less leadership of Europe Ironically as Germany in recent years has emphasized its relationships within Europe it has shown less leadership of Europe This has disappointed and increasingly frustrated Washington particularly American multilateralists The United States has for decades counted on Germany to be the decisive swing vote between French and British views on economic and security issues and more broadly to encourage the European Union to look responsibly beyond the mutual protection of national interests While the United States cannot offer as much directly on the security front to Germany as it did during the Cold War Germany s postwar economic leadership was always more in W a s h i n g t o n 6 5 9 3 2 2 5 D C 2 0 0 3 6 1 9 0 3 www i i e c o m Number PB06 1 its own self interest than simply payback for the American security guarantee In fact as globalization proceeds and economic performance in the eurozone continues to stall it is all the more important for Germany to keep the global economy open and stable Germany was once again the number one exporter in the world in 2005 and net exports have been the primary source of growth in the German economy in recent years At the same time by showing leadership in these crucial economic issues the new German government is likely to elicit more constructive behavior from US officials in areas where bullying or disregard of EU views has become increasingly the norm If US officials see the economies of continental Europe in general and Germany in particular as declining and their international economic policies as fecklessly pursuing narrow state sponsored advantages then such disregard can become increasingly destabilizing for the global economy The key areas of German opportunity and US need are reducing agricultural subsidies coordinating on relations with China and securing the flow of international investment B u y i n g O u t Ag r i c u lt u r a l P r ot e c t i o n Recent discussions have thankfully already made it trite to recognize that agricultural trade liberalization would do more than almost anything else to bring the developing world out of poverty Cline 2004 and references therein It has also become obvious that in the absence of such liberalization the Doha round of multilateral trade negotiations will fail The rich world s resistance to liberalization ultimately rests Merkel could save the Doha round by reinterpreting the budget deal just made on agricultural support funds at the EU summit upon the ability of France and Poland to subsidize their farmers using the European Union s common agricultural policy CAP rather than buying them out If Germany can get the French and Polish governments to do what it did to reduce its workforce of coal miners in decades past and what South Korea is committed to doing to buy out its own Posen 2005a argues for the self interest of Germany as well as the global interest in Germany securing globalization by asserting leadership of the European Union on economic liberalization JANUARY 2006 farmers then the dominoes will have little choice but to fall in Tokyo and Washington as well particularly after the official statement made at the APEC Economic Leaders
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