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US and Europe differ on fiscal policy 2010-May-30 at 06:22 PST

Posted by Scott Arbeit in Blog.
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Geithner in Europe: US and EU Oceans Apart on Fiscal Policy, 27-May-2010

Europe is eager to begin paying down sovereign debt. The US wants to see Germany and France continue stimulus measures. With Treasury Secretary Timothy Geithner in Germany on Thursday, the trans-Atlantic differences in fiscal policy have become difficult to ignore.

But the camaraderie displayed on Thursday belied some recent tension in the trans-Atlantic relationship. For one, the US has not been impressed with Germany’s recent decision to ban certain kinds of naked short selling, considering it an unhelpful bit of unilateralism.

On a more fundamental level, however, Washington is concerned that, should Europe overreach in its rush to cut government spending, it could endanger the fragile economic recovery that has taken hold on the Continent and around the globe. In particular, the US would like to see countries like Germany and France continue efforts to stimulate their economies.

As I’ve mentioned before, I wholeheartedly support the move by the Obama Administration to pursue an international agreement on financial industry regulation and reform.  Financial regulation, however, is not fiscal policy, and on fiscal policy we’re seeing some sharp differences between the US and the EU right now.

To some extent, I’m not surprised by this.  The shock just felt in Greece, and therefore in the rest of Europe, has led many European leaders to draw the simple and obvious conclusion: debt and deficits are bad, and lead to bad outcomes.  Germany is simply saying to Europe: we’re the most stable economy here, we can borrow currency at incredibly favorable rates, and even we’re not interested in debt and deficits anymore.

The sad fact is that the United States is still far more comfortable with deficits and debt than Europe is likely to be over the next decade or so.  With that said, I appreciate the position that the Obama Administration – including Timothy Geithner, Paul Volcker, and Christina Romer – are taking: without fiscal stimulus, the entire world economy would have sunk, and it’s just too early to end that right now.

I have no impression whatsoever that the Obama Administration is in favor of endless high government spending; rather, I have the opposite feeling: that they’d love to cut spending as soon as they can, and as much as Congress will let them (and don’t forget, Congress makes the budget, not the President).  Everyone in the Administration has made that clear at every opportunity.  The important question remains: when is the right time to shift fiscal policy from stimulus to spending cuts?

There is much legitimate debate on this question.  Unfortunately, the alleged science of economics brings us answers on both sides of the question, and so we’re left with the artistic choices made by various governments.  Europe has one answer now; America has another.  I believe that if the United States just went through a debt scare like Europe just did, that we’d be highly motivated in the short-term to cut spending as well.  We haven’t – in fact, we’ve experienced a resurgence in the perception that the dollar is the most secure currency in the world – and so we continue to favor stimulus.

We all know that we’ll get to cutting the deficit, and paying down our debt, at some point… I’d rather it be sooner, because we need to start having the public debates about spending that will lead to a generational transformation in Congress.

And, of course, we need Congressional term limits. Desperately.

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