'Clueless' – the German verdict on US policy for recovery

Business Editor,David Prosser
Saturday 06 November 2010 01:00 GMT

Germany's finance Minister yesterday launched a remarkably frank attack on the US, branding the country's economic policy "clueless".

Wolfgang Schäuble was joined in his criticism by the Chinese, who said they were "owed an explanation" for the Federal Reserve's decision on Wednesday to renew its programme of quantitative easing with $600bn of new money.

Mr Schäuble, whose government has presided over a strong rebound in the German economy while calling for European nations to rein back on their budget deficits, said he did not believe the QE initiative would be successful in kickstarting the American recovery, as the Fed hopes.

"They have already pumped endless amounts of money into the economy with extremely high budget deficits, and with a monetary policy which has already pumped in lots of money," Mr Schäuble said. "The results have been hopeless. With all due respect, [the] US policy is clueless."

The German hostility reflects a fundamental disagreement with the US over economic thinking, but the country is also, like other big exporters such as China, concerned about the implications for the dollar. One side-effect of the QE programme is likely to be a fall in the value of the US currency, which would damage the competitiveness of exporters to America.

Zhou Xiaochuan, head of theChinese central bank, said yesterday that the US had acted selfishly. "If the domestic policy is optimal policy for the United States alone, but at the same time it is not optimal policy for the world, it may bring a lot of negativeimpact," he said. China's Vice Foreign Minister Cui Tiankai added: "They owe us some explanation."

China, to which the US is almost $800bn in debt, is now likely to press American officials on the QE issue at what now looks likely to be a stormy meeting of the G20 nations in South Korea next week. The US will also face pressure at the summit from Brazil too, which has also been angered by the potential damage the Fed's move threatens to do its exports.

The row underlines the way in which the global agreement on the best economic and financial responses to the credit crisis, which was impressively strong two years ago, has completely broken down. The criticism of the US follows accusations that leading economies have been fighting a "currency war" to give themselves an unfair edge over other countries.

Ironically, the latest economic news from the US yesterday surprised on the upside. Non-farm payrolls – a key measure of American employment – rose by 151,000 last month, the first rise since May, the Labour Department said. Economists had been predicting an increase, but the figure was almost three times higher than expected.

Nigel Gault, the chief US economist at IHS Global Insight, said: "It's still in the realm of a moderate recovery: it's both better than people had been looking for and it's another nail in the coffin of a double-dip [recession]."

If the data is reinforced by further positive news in the weeks ahead, the Fed is likely to come under pressure to curtail its second round of QE early. But Alan Ruskin, an analyst at Deutsche Bank, said: "We need a string of these kinds of numbers before it is realistic to flirt with the Fed terminating the exercise before the second quarter 2011 due date."

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