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The Odd Couple is Back!

I always thought that, after a brief period of mutual admiration some centuries ago, the French and the Americans could not get along so well (with the brief interlude of WWII, against the Nazi). I even seem to remember of a boycott of French Frites in the United States during one of the several recent Middle East wars.

Anyway, those days are gone. Yes, because the French-presided IMF (International Monetary Fund, the Chair being Mme Lagarde), whose shareholder of greatest weight is indeed Mr. Obama, has been recently – quite silently but not too discretely – pushing Mrs. Merkel, forceful leader of Germany  but unwilling leader of Europe, to act.

How so? Oh well, by sponsoring fiscal-led growth, which Germans have been refusing so far to consider. How do I know this? For starters, take a look at the Economist - where it is mentioned that the IMF is fearing “perverse austerities” with its “unpleasant implication … that a tightening of fiscal policy may raise rather than reduce spreads if it is accompanied by a decline of GDP (with respect to the baseline). Indeed, the estimated coefficients imply that this would happen for a fiscal multiplier higher than 1.2-1.3 (in this case the primary balance would improve, but the debt to GDP ratio and the CDS spreads would increase).”

Translated; by giving up on fiscal expansion not only you foolish Europeans (Germans?) are giving up on a boost to GDP but also to stability since both debt over GDP and spreads on governments bonds will worsen, going up.

Did I forget? That’s right, the IMF Chief Economist is also French. He is the one that must have thought of first commissioning to his staff and then publishing this Figure 4 below.

In it you see that spreads related to government bond risk go down and market perception improves together with short-term boosts in growth .

It was time. That the odd couple be back. To save Europe. Obviously each one has also its own selfish goal: M. Sarkozy has elections coming soon and can’t say too much the things he’d like to say, while Mr. Obama hopes that he does not end up facing elections with the collapse of the euro worsening the global and national outlook.

But, there also more serious issues at stake for which their fight will be deemed honorable.

In the Odd couple Jack Lemmon – Felix Ungar says: Funny, I haven’t thought of women in weeks and Walter Matthau – Oscar Madison replies I fail to see the humor. Well, I am quite sure of one thing. Neither Sarkozy nor Obama have stopped thinking about a good economy. And not seeing one in years, well, there is certainly no humor in that.

PS: if you are still not convinced, see the President of the World Bank appeal to Germany yesterday.


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