Friday, June 12, 2009

E.U. vs. the U.S.: Gaming the Economic Crisis

. Friday, June 12, 2009

As bad as things have been in the U.S., they have been worse in the E.U. And while America is showing some signs of recovery Europe is falling further, and doing so rapidly. Why? Possibly because the U.S. was more proactive in "fixing" the banks, while major E.U. economies like Germany have been severely by shrinking exports.

The E.U. is determined to not run up massive debts, or incur high inflation in the future. The U.S. is less concerned about both prospects, and is instead determined to generate positive growth as quickly as possible. What are trade-offs?

1. The U.S. is primarily concerned with averting a Great Depression-style disaster in the short run, and are willing to sacrifice just about any damn thing in the medium or long run to achieve that. Obama's economic policy so far hasn't been especially coherent, but if I had to sum it up in one sentence it would be "Yeah? Well, we'll cross that bridge when we come to it". This is a gamble, yeah, but the alternatives aren't pretty. The U.S. is willing to run up a bunch of fiscal debt and simultaneously pursue the greatest expansionist monetary policy of all time (including heretofore unheard-of quantitative easing programs), while banking on the hope that they can effectively rein in inflation in the future without destroying the economy completely in the process and manage to service the debt without sacrifice credibility. If they pull it off, it will be a pretty amazing feat. However, this model doesn't travel. The U.S. is the only country on earth that has the capabilities, credibility, and, er, chutzpah to ever get the credit for this sort of gamble.

2. So the E.U. is doing what comes naturally: keep deficits relatively low, and therefore maintain credible commitments to fight inflation and service debt, and hope the U.S. recovers relatively quickly. If that happens, then hopefully the U.S. will boost global demand again, Germany (and others) and start exporting again, and then employment ticks back up. Is it free-riding? Of course, but it's also probably the most sensible course of action for the ECB and member governments to pursue.

So what's the rub? Well, the only European country to pursue U.S.-like policies is the U.K., and their recovery seems to be much more advanced than the rest of the Eurozone:

Of course, the U.K. is making many of the same gambles as the U.S., and if the bet blows up Stateside it will blow up on the other side of the pond as well. But if the U.S. can walk the tightrope, then they will end up in a much better place than most of the rest of Europe. And if the U.K. can manage the same... then I'll start believing in the Underpants Gnomes.


E.U. vs. the U.S.: Gaming the Economic Crisis




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