DO THE U.S. AND EUROPE NEED STIMULUS OR AUSTERITY?

July 1, 2010

Europe seems to be adopting "austerity" measures while our administration is advocating stimulus for Europe and even more stimulus for the United States.  What's wrong?  Doesn't economic theory provide the answer and shouldn't the answer be the same here as in Europe, asks Bob McTeer, a Distinguished Fellow at the National Center for Policy Analysis and former President of the Dallas Federal Reserve Bank. 

The first step in sorting this out is to acknowledge that the problem to be fixed is not exactly the same in Europe and the United States, explains McTeer: 

  • We both need stimulus to boost a weak recovery.
  • We both have growing budget deficits and debt levels that should be reduced.
  • However, the budget and debt piper to be paid has shown up in Europe already, beginning in Greece and affecting all 16 members of the European Union through the impact on the euro. 

Stimulus to promote growth in Europe may be needed and important; deficit reduction in Europe is urgent, says McTeer.  Deficit reduction and bending the debt growth curve down is also extremely important for the United States.  However, it's not yet as urgent as in Europe.  Maybe it's luck; maybe the dollar's role as a reserve currency has something to do with it.  In addition, we see signs that our recovery may be losing steam, deflation increasingly seems more likely than inflation, and the dollar is rising rather than falling against most currencies, if not against gold. 

Meanwhile, in the United States, the impression of inflationary money growth is finally, but gradually, giving way to recognition that the money supply just isn't growing that fast, says McTeer.  

Europe is right to place deficit reduction at the top of its priority list.  We should place it close to the top.  We should be careful, however.  Europe's austerity program will weaken European demand for U.S. goods and make the weakening economy more variable.  We are right to urge them to stimulate their economy only if they can do so without triggering a renewed debt crisis, says McTeer. 

Source: Bob McTeer, "Do The U.S. And Europe Need Stimulus Or Austerity?" Forbes, June 30, 2010. 

For text:

http://blogs.forbes.com/streettalk/2010/06/30/do-the-u-s-and-europe-need-stimulus-or-austerity/

 

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