Speeches & Texts
European School of Management and Technology (ESMT) Open Lecture Series
Berlin, September 13, 2010, 12:30-13:30
Ambassador Philip D. Murphy
Ich freue mich sehr, wieder an der European School of Management and Technology zu sein. Präsident Röller hat mich kurz nach meiner Ankunft hier in Berlin auf diesem einzigartigen Campus herumgeführt. Er hat mir auch Erich Honeckers berühmten Rosengarten gezeigt. Die Wandgemälde, die den Beitrag der Arbeiter zur Volkswirtschaft würdigen, erinnern lebhaft an diese Zeit der deutschen Geschichte. In den vergangenen zwölf Monaten hatte ich viele Gelegenheiten, verschiedene Gegenden Deutschlands zu besuchen – im Osten und im Westen – und mehr über die faszinierende Geschichte dieses Landes zu erfahren. Vor zwei Wochen hatte ich die Ehre, zusammen mit dem ehemaligen Außenminister Hans-Dietrich Genscher Halle zu besuchen. Das war wirklich eine große Ehre, denn er hat solche Rundgänge in der Vergangenheit mit sehr herausragenden Persönlichkeiten gemacht – Henry Kissinger, James Baker, Michael Gorbatschow und Eduard Schewardnadse, um nur einige zu nennen. Sie haben Halle zusammen mit Hans-Dietrich Genscher in den aufregenden Jahren unmittelbar vor und nach der deutschen Wiedervereinigung besucht. Als Genscher mich einlud, sagte er: „Wer Halle nicht kennt, der kennt auch Deutschland nicht.“
[I am very pleased to be back at the European School of Management and Technology. President Röller showed me around this unique campus shortly after my arrival in Berlin. He showed me Erich Honecker’s famous rose garden in the back. The murals honoring workers’ contributions to the economy are a vivid reminder of that period of Germany’s history. Over the past year, I have had the opportunity to visit many parts of Germany - both East and West – and learn more about its fascinating history. Two weeks ago, I visited Halle with former Foreign Minister Hans-Dietrich Genscher. It was indeed a treat because he has given similar tours to some very distinguished personalities -- Henry Kissinger und James Baker, Mikhail Gorbachev and Eduard Schewardnadse to name a few. They visited Halle with Minister Genscher in the heady years just before and after German Unification. When he invited me, Minister Genscher said, "Wer Halle nicht kennt, der kennt auch Deutschland nicht.” ]
Well, now I have been to Halle and although I know there is still much to learn, I feel permitted to make an observation. Namely, that in many instances there are fewer differences between Germany, East and West, than Germany, North and South, or other regional comparisons. And that, in the context of the upcoming 20th anniversary of German Unification, is a very good thing.
Twenty years ago President George H.W. Bush recognized that decisions then being made would influence the course of Europe and international relations for decades to come. He made it very clear -- through word and deed -- that America stood by Germany at this critical moment and that a new European system would offer security as well as freedom. And he was right.
The last few years have also seen some extraordinary developments. Just as we will be studying the implications of German Unification for years to come, economists believe we will be studying the recent financial crisis decades from now. The crisis was an event of historic proportions. We entered uncharted territory and it is probably too soon to say it is completely over.
Clearly, however, we have moved into a new phase of the recovery,. When I visited ESMT last year, the recession had officially come to an end, but optimism was not a word many of us had on the tip of our tongues. Output around the world had just dropped by historic proportions, the viability of our largest financial institutions was still an open question, and fear that the next shoe of the financial crisis was about to drop – this time a sovereign debt crisis in the “peripheral economies” of Europe – was on everyone’s mind. If you had asked me even six months ago – before Chancellor Merkel and other European leaders took the decisive steps to contain the Eurozone debt crisis – how things would look today, I’m not sure I could have imagined their turning out how they have.
Granted, some of the global growth over the past year was to be expected. In normal business cycles, there is a tendency for the economy to function a bit like a trampoline. Economic activity falls but then bounces back. In fact, historically the steeper the drop in GDP, the stronger the bounce back, in part because the greater the pent up demand and also because firms must rebuild their inventories.
Not everyone was so sure things would turn out as they have, however. In the recent crisis, the supports of the trampoline appeared to be broken. Domestically, governments needed to stabilize the financial markets while strengthening aggregate demand. Steps for the longer term – in the G-20, Basel Committee and elsewhere – were also required to reform the global financial architecture. In other words, it was necessary to fix the supports of the trampoline all at once; otherwise, the economy could have continued spiraling down. Although it may not be good politics to work on so many fronts all at once, we had little choice.
Economic historians may find fault with some of the measures that were implemented. Nevertheless I believe that swift and decisive action on the part of the world’s largest economies – that is, by our political leadership and also our central banks – was a crucial factor in stabilizing the global financial system and putting our economy back on track. And although risks remain, I would dare say we are in a better place today than we were a year ago.
As an academic, President Röller, it must be an incredibly fascinating time to be in your line of work!
German Recovery
Nowhere has the ride been more thrilling than in Germany, which has just had a tremendous recovery. What a summer it has been.
First, the banks. Only one bank failed the EU bank stress tests at the end of July. The news from this exercise was not completely positive, but it did result in a good deal more confidence in the financial sector than before. This eased concerns over credit availability.
Next, jobs. Truly amazing. Unemployment is at 7.6% -- a 17-year low. Even more impressive, the jobless rate never rose above 8.3% (April 2009) during the crisis.
And of course, growth: With the strongest second quarter since reunification, the economy should grow by 3% this year. The Bundesbank has characterized the German recovery as “self-sustaining,” meaning it can hold up even as the government’s stimulus funding is phased out.
This means, of course, the German fiscal situation is also brightening. Though this year’s deficit is still a record, it now looks possible for Germany to meet its EU and constitutional deficit requirements ahead of schedule.
Business confidence is up and consumer confidence is holding steady.
All of this follows Germany’s worst recession since World War II, with a drop in GDP of 5% last year.
U.S. Recovery
The U.S. economy is also growing, despite recent talk of a “double dip” recession. Certainly, our recent growth numbers are less than what we had hoped for: 1.6% in the second quarter. But this was the fourth consecutive quarter of positive growth and beat many private estimates. Out growth for 2010 is expected to be 3.3%, which is actually higher than the expected growth for Germany despite its strong second quarter.
Driving the U.S. recovery were several sectors that should indicate more growth to come: business investment in new machinery, computers and software increased nearly 25%. American households and businesses also increased spending at a fairly rapid clip. President Obama’s stimulus measures were certainly part of the reason for this success.
As you know, however, there are at least two elephants in the room, and they happen to be related. One is, obviously, jobs. At 9.5%, our unemployment rate is painfully high and is having a harmful impact on consumer spending, which has traditionally driven much of our GDP growth. Fortunately, there are some recent signs that private sector job creation is beginning to pick up.
The other is housing: new housing starts dropped following the expiry of the homebuyer tax credit. If people are not bringing home pay checks, they cannot afford to make their house payments. This can translate into foreclosures or simply a lack of demand in the market, which is so closely correlated with many Americans’ wealth. Americans are also famously mobile, and have relatively few qualms about picking up and moving to where the jobs are. But if you are unable to sell your house, this becomes much more difficult. So the employment and housing market situations are in some ways connected.
As you know, Fed Chairman Ben Bernanke has indicated growth in coming months may be more moderate, and the Fed is prepared to provide additional monetary accommodation, especially if the outlook deteriorates. President Obama has likewise proposed additional growth-boosting measures, including R&D tax credits and new infrastructure funds to modernize America’s transport infrastructure. While most economists consider the possibility of a double dip recession in the U.S. unlikely, the President wants to make sure we are not neglecting investments in our economy that will pay dividends in terms of long-term growth.
Long-Term Adjustments?
Though one needs to be cautious at this point, there still could be some positive, longer term trends buried in our mixed bag of economic data.
Take housing, for example. The U.S. housing market was a key driver in the financial crisis.. This bubble is now at least partially deflated, which is a necessary part of the longer term adjustment that the U.S. economy is undergoing.
Of course, supporting the real estate boom in the United States was a workforce with the skills needed to build houses, furnish them, lend money to buy them, sell them, and so on. If the housing sector is a smaller share of the U.S. economy over the long-term, many Americans will be looking for jobs in other sectors. And the construction sector must also adapt. There are already some positive signs. For example, the green building sector is now building one out of every three new buildings in America, and is hiring new workers around the country. Adjustment will clearly take time.
Another indicator worth mentioning is our personal savings rate – the other side of the consumption data. Easy access to credit and other factors drove the savings rate below zero in 2005. According to the latest figures, the personal savings rate now stands at 6.5%. This is a very meaningful shift, and is a positive sign that Americans are rebuilding their balance sheets. A higher savings rate in the United States, however, also represents less demand in the U.S. – and global – economy. Export-driven economies, such as Germany, do not face the same U.S. market conditions that they did prior to the financial crisis.
So some of these adjustments may be partially responsible for the slowdown in growth in the short term, but are at the same time necessary to sustain future growth -- part of the equation in reducing an unsustainable current account deficit.
National Export Initiative
An area where we would like to see further improvements is exports. While we clearly have a long way to go,
I was heartened to learn last week, however, that our trade gap appeared to have narrowed in July, thanks to both the export of airplanes but also lower imports.
President Obama would like to ensure that this continues, and that we do not fall back into a pre-crisis equilibrium – an equilibrium which is anything but balanced and sustainable. Though it will not be easy, President Obama is determined to change this.
One important way he will do so is via his National Export Initiative, or NEI, which he first made public in his State of the Union Address last January. The NEI is the President’s plan for doubling U.S. exports over the next 5 years.
For the first time, the United States will have a government-wide export-promotion strategy with focused attention from the President and his cabinet and $140 million in additional funding to back it up.
As Germans know well, export sector jobs are generally secure and well-paying. The OECD says that export sector jobs are also more resistant to downturns, as firms are less likely to shed the more highly skilled workers that fill them. Part of the NEI is also to support 2 million American jobs.
Increasing U.S. exports will lead to long-term, sustainable economic growth. It is also critical to restoring the global economy to health, and therefore part of the U.S. government’s commitment to adhere to its G-20 commitments to “strong, sustainable and balanced growth.” We at the U.S. Embassy in Berlin are engaged on many fronts in promoting the NEI – most noteworthy perhaps via the excellent trade fairs that Germany is famous for. There is enormous potential for U.S. companies to utilize such fairs to look for new market opportunities both in Germany and beyond for their products.
Deficit Reduction
Germany has taken a strong stance on fiscal responsibility. Chancellor Merkel and Finance Minister Schäuble have been among the most vocal advocates for implementing a fiscal exit strategy in Europe and in the G-20, and is leading by example with its own 4-year, €80 billion austerity package.
Certainly, the U.S. and Europe have discussed issues of timing when it comes to our fiscal exit, especially in the context of the G-20. We may have some different perspectives, but we both firmly agree on the longer term need to reduce our budget deficits. Clearly, if the U.S. economy and indeed the global economy are to get back on a track of sustainable growth, we need to tackle the enormous pile of debt that has grown during the crisis. It was already too large before.
I’ve already mentioned that the U.S. personal savings rate is on the rise, and Americans are taking steps to rebuild their balance sheets. The federal government will soon need to get its house in order, as well: our deficit looks to be around $9 trillion over the next decade if unchecked. The President recognizes fully this need.
But first, where did this deficit come from? It resulted from $4 trillion in tax cuts implemented by the previous administration; $3.5 trillion in lower tax revenue and automatic spending increases, such as food stamps and unemployment insurance, due to the recession; and $700 billion in Medicare prescription drug costs. Contrary to popular belief, only around 10% comes from stimulus spending.
President Obama has already taken important steps to address this, and will be doing more. The comprehensive health insurance reform we have just enacted takes on the forces underlying rising health care costs, a key driver of the nation's long-run fiscal imbalance.
President Obama's FY 2011 budget proposes a three-year freeze in non-security discretionary spending.
The President has also created the National Commission on Fiscal Responsibility and Reform. This bipartisan Commission is charged with recommending measures to reduce the deficit to about 3 percent of GDP by 2015.
We also expect GDP growth to help improve the picture: the United States has a resilient and flexible economy, and a relatively young and growing population. Our economy is well positioned to face challenges of the global markets and global competitiveness, and resume strong growth in the longer-term.
Getting our public deficit under control is one of the great challenges of the next few years – this is one reason President Obama joined Chancellor Merkel and other G-20 leaders meeting in Toronto in June in agreeing to halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016.
German Risks
While the German economy appears to be humming along nicely for the time being, economists have pointed out potential risks on the horizon.
Despite real improvements in consumption and investment, for example, growth has been largely export-led, with exports up 27% in the first half of 2010. And where are they going? Increasingly to emerging markets. Exports to China increased 66% and to South East Asia 73%.
Wolfgang Franz, Head of the Council of Economic Experts (the so-called “Five Wise Men”), recently warned that the German economy might not be able to sustain the current dynamic of its economic growth. He cited weakening external demand and growth differentials between Germany and other EU states, which would like Germany to import more of what they produce.
Slower growth in the United States – Germany’s number 2 export market – will certainly not help. Moreover, signs are also pointing to a slowdown in emerging markets, such as China and India.
Other forces may play a role, however. Some German companies are reporting shortages of skilled labor, so upward pressure on wages could lead to greater consumption. This might breathe new life into the recovery while boosting that of its major trading partners, especially in Europe.
There may be limits to how far this can go. With a strong dependence on exports, Germany is still highly vulnerable to the roller coaster of global demand, just as it was before the global economic crisis.
Organizations like the OECD have therefore made specific recommendations for how Germany might extend the success of Germany’s export sector to other parts of its economy. Some ideas include: 1) making product market regulation "more competition friendly," 2) improving framework conditions for innovation, 3) raising education attainment and outcomes, and 4) attracting high-skill immigrants.
None of these suggestions strike me as particularly easy solutions. Some of them may even hit sensitive nerves. But the potential payoffs to longer term growth could be considerable, according to the OECD.
Of course, there is also the “capital account” side of the equation. Germany is a “world champion” exporter of capital seeking higher returns abroad – one of the reasons German financial institutions suffered so heavily during the financial crisis. Reforms in the financial sector might also help address external imbalances.
Let me conclude by reiterating my belief that we should not underestimate how far we have come since the financial crisis reached a crescendo in fall 2008. The extreme volatility and uncertainty that characterized that frightening period has mostly subsided, and the global economy is expanding. We have a lot to be proud of, but still need to be vigilant to ensure the global recovery continues. And, we dare not underestimate how far we still have to go.
Here in Europe, there is also a debate underway– especially in the context of the Eurozone sovereign debt crisis – to address divergence that can be destabilizing. Reforms under discussion in Brussels include proposals to improve macroeconomic surveillance, and we will be watching developments in Brussels this fall with keen interest.
In fact, however, much of the hardest work still lies ahead – not least in my own country.
Last week, President Obama addressed this issue very directly and honestly. Looking back on his first 18 months in office, he talked about his vision for the future of the American economy and about specific ways to move it forward. As I mentioned before, he aims to strengthen the recovery by investing in America’s transportation infrastructure – putting Americans back to work rebuilding America’s roads, railways and runways; by helping small businesses grow and hire; and by giving them certainty through a permanent incentive to innovate and create good jobs in America in the Research and Experimentation Tax Credit. These measures will help create jobs while building an American economy that is more competitive and productive over the long term. President Obama said very bluntly that he would not cut back on those investments that will grow the economy in the future – investments in areas like education and clean energy and technology -- because economic growth is the single best way to bring down the deficit. He also spoke more personally about American values and the America that he believed in – an America, he said, an America where you don’t buy things you can’t afford, an America that takes pride in the goods it makes; and an America where we don’t just think about today, we think about tomorrow;
Ich freue mich auf Ihre Ansichten zur zukünftigen Erholung der Weltwirtschaft und dazu, was wir tun können um zu gewährleisten, dass die nächste Stufe der Erholung nachhaltig ist.
[I look forward to your insights on where we are headed tomorrow in the global recovery, and what we can do to ensure the next stage of the recovery is sustainable.]
As prepared for delivery.