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

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.

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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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The more hopeful, more realistic view of Europe 2010-May-18 at 09:35 PDT

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In my previous post, I talked about the bleak view of Europe right now.  What would a set of more hopeful, more realistic perspectives look like?

Here are seven that, taken together, work for me.

  1. The idea that the EuroZone would never run into a major political crisis was naïve to begin with, and that crisis has now arrived.  It’s been a while since we really needed the grown-ups in European politics to step up, and they’re all a little slow out of the gate and a bit rusty at it, but now that this has come, we’ll see the important leaders taking responsibility for steering Europe through this.  I think they’re getting the hang of it, now that the $1T bailout package has been announced.
  2. No central European decision-maker would seriously consider dismantling the Euro.  It’s done too much to smooth relations between countries who have centuries of history of war.
  3. Some of the governments that supported the bailout will lose their next national elections, because, again, not all voters in Europe are at Green.  The results of these elections will be developmentally appropriate for those countries.  In fact, it’ll serve as an interesting Integral litmus test of some rough kind to show where populations are operating from during this crisis.  They might come from a later stage of development when things are good, but where are they when things seem bad?
  4. Even those new governments who won elections by harnessing voter anger won’t seriously argue either to end the Euro, or to unilaterally withdraw from it.  Some from those parties might talk about ending the Euro to placate their supporters, and might even stir up some populist energy, but when it comes down to it, none of them really want to invest their political lives in making that happen, and any passion around that will subside, probably by 2012.
  5. It’s going to take years to get the countries with high deficits back on a path to growth.  This is a very difficult set of circumstances for any government, or any Central Bank, to manage.  If they soft-land this, the way Obama soft-landed the crash he inherited, and you start to see a turnaround in growth in three years, I’d call that a masterful job of managing a potentially fatal blow against the Euro, wouldn’t you?
  6. The next time Europe appoints a President, they’ll realize the mistake they made choosing someone with no real international power, and put a big name in that spot.  Seriously, how many times have you heard the name Herman Van Rompuy during this thing?  If you need more than one hand to count that up, you’re reading news stories that I’m missing.  Imagine how this would be different if Tony Blair were in that position, and you’ll see how they’ll want someone who can provide that level of international presence and political cover for them in a crisis.
  7. The Euro will survive… the halo will have come off of it a bit, but having gotten through this major test, it’s future as THE single currency of all of Europe – as an important step to take as a new world economy forms, centered in Asia – will be assured.

And hopefully history will note that this set of leaders took action at a crucial time to ensure that the Euro remained on track.

That’s the hopeful view, and the realistic view, of what Europe is about to go through for the next few years.  I’m fascinated to watch it unfold.

The bleak view of Europe right now 2010-May-18 at 09:30 PDT

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The Euro’s Lost Promise, by David Marsh, 17-May-2010

In any international crisis, there will be those who believe that the crisis-in-question merely portends an even more difficult future.

The dream of monetary union across Europe has turned into a nightmare. Led by France and Germany, European countries have decided to spend colossal sums of taxpayers’ money they cannot afford to heal mounting internal disparities they cannot conceal to shore up an edifice many believe cannot stand.

Yeah, well, when you look at it that way, it does suck.

Look, the voters in Europe aren’t all that different from the voters in the United States. It’s not like they’re all at Exit Green, just about to pop to Second Tier.  There are lots of them at Blue, lots of them at Orange, and lots of them at Green.  Just shift the center of gravity up about half a level from where the United States is, and you’re getting the picture.

And even within that group, there are different countries with different centers-of-gravity… just like we have amongst the states here.

Some of those countries will have an easier time understanding why this bailout had to be done, and some will have a much more difficult time.  That’s to be expected.  So the rollercoaster we’re about to go on will, sometimes, look a lot like Mr. Marsh is describing.

There was, however, one thing I heard in the article that made it clear to me where Mr. Marsh was coming from.

Decisive backing came from President Obama, who on the eve of the Brussels meeting telephoned Mrs. Merkel to warn her that Europe’s failure to act could set off another worldwide credit crunch. His intervention was incongruous in the extreme: an American president urging the German chancellor to shore up a currency union that was meant to bolster Europe’s financial independence from the United States.

If you can’t imagine that President Obama would want to weigh in on something that could affect the lives and happiness of over 830 million people in Europe, and billions more around the world trying to do business with Europe… you probably also have a needlessly pessimistic view of things in general, and perhaps a center-of-gravity from somewhere in First Tier which would make global cooperation seem “incongruous.”

So let’s be clear… this is the bleak view of things.  This is the warning from those who think the worst-case is coming: the dismantling of the Euro, which could lead to growing tensions and competition amongst those countries who no longer make common cause over currency.