Some commentators have savaged Europe’s policymakers for not orchestrating as aggressive a fiscal and monetary policy as their US counterparts have. But these critics seem to presume that Europe will come out of the crisis in far worse shape than the US, and it is too early to make that judgment.
STOCKHOLM – What will Europe’s growth trajectory look like after the financial crisis? For some Europeans, still nervous that their economies and banking systems might collapse, this is a little like asking a passenger on the Titanic what they plan to do when they arrive in New York. But it is a crucial question to ask, especially when Europe has been facing so much outside pressure from the likes of the United States and the International Monetary Fund to focus on short-term Keynesian stimulus policies.
True, things are pretty ugly right now. Europe’s income is projected to fall a staggering 4% this year. Unemployment will soon be in double digits throughout most of the Continent, with Spanish and Latvian unemployment on track to exceed 20%. Europe’s banking system remains sickly, even though many national governments have gone to great lengths to hide their banks’ woes.
Yet, ugly or not, the downturn will eventually end. Yes, there is still a real risk of hitting an iceberg, beginning perhaps with a default in the Baltics, with panic first spreading to Austria and some Nordic countries. But, for now, a complete meltdown seems distinctly less likely than gradual stabilization followed by a tepid recovery, with soaring debt levels and lingering high unemployment.
It is not a pretty picture. Some commentators have savaged Europe’s policymakers for not orchestrating as aggressive a fiscal and monetary policy as their US counterparts have. Why else is Europe suffering a deeper recession than America, they complain, when everyone agrees that the US was the epicenter of the global financial meltdown?
But these critics seem to presume that Europe will come out of the crisis in far worse shape than the US, and it is too early to make that judgment. An epic, financial-crisis-driven recession, such as the one we are still experiencing, is not a one-year event. So policymakers’ responses cannot be evaluated by short-term measures, either. It is just as important to ask what happens over the next five years as over the next six months, and the jury is still very much out on that.
America’s hyper-aggressive fiscal response means a faster rise in government debt, while its hyper-expansive monetary policy means that an exit strategy to mop up all the excess liquidity will be difficult to execute. Government spending in the US has risen in short order from 18% to 28% of income, while the US Federal Reserve has effectively tripled its balance sheet. Europe’s more tempered approach, while magnifying short-term risks, could pay off in the long run, especially if global interest rates rise, making it far more painful to carry oversized debt loads.
Access every new PS commentary, our entire On Point suite of subscriber-exclusive content – including Longer Reads, Insider Interviews, Big Picture/Big Question, and Say More – and the full PS archive.
Subscribe Now
The real question is not whether Europe is using sufficiently aggressive Keynesian stimulus, but whether Europe will resume its economic reform efforts as the crisis abates. If Europe continues to make its labor markets more flexible, its financial market regulation more genuinely pan-European, and remains open to trade, trend growth can pick up again in the wake of the crisis. If European countries look inward, however, with Germany pushing its consumers to buy German cars, the French government forcing car companies to keep unproductive factories open, etc., one can expect a decade of stagnation.
Admittedly, the past year has not been a proud one for policy reform in Europe. Recessions have never proven an easy time for European leaders to push forward with reforms. Matters were not helped when the Czech government lost a confidence vote midway through its six-month presidency of the European Union, leaving a lame duck European Commission. The shadow of forthcoming elections in Germany, together with concern over whether Irish voters will ratify the Lisbon treaty (giving Europe a badly needed new constitution), has conspired to impede reform momentum.
Yet Europe’s many strengths, including strong democratic governments and sound legal institutions, are often under-rated as long-term competitive strengths in today’s globalized economy. The recent recession has presented challenges, but European leaders were right to avoid becoming intoxicated with short-term Keynesian policies, especially where these are inimical to addressing Europe’s long-term challenges.
If reform resumes, there is no reason why Europe should not enjoy a decade of per capita income growth at least as high as that of the US. Moreover, with growing concerns about the sustainability of US fiscal policy, the euro has a huge opportunity to play a significantly larger role as a reserve currency.
One shudders to think what will happen if Europe does not pull out of its current funk. Certainly, Europe would lose traction as a badly needed counterweight to the US in world economic policy. Europeans may not mind this right now (one sees more Obama t-shirts in Europe than in the US), but they might not be so happy if a George Bush III comes along. Fortunately, Europeans will probably not wait so long to start moving ahead again.
To have unlimited access to our content including in-depth commentaries, book reviews, exclusive interviews, PS OnPoint and PS The Big Picture, please subscribe
In the United States and Europe, immigration tends to divide people into opposing camps: those who claim that newcomers undermine economic opportunity and security for locals, and those who argue that welcoming migrants and refugees is a moral and economic imperative. How should one make sense of a debate that is often based on motivated reasoning, with emotion and underlying biases affecting the selection and interpretation of evidence?
To maintain its position as a global rule-maker and avoid becoming a rule-taker, the United States must use the coming year to promote clarity and confidence in the digital-asset market. The US faces three potential paths to maintaining its competitive edge in crypto: regulation, legislation, and designation.
urges policymakers to take decisive action and set new rules for the industry in 2024.
The World Trade Organization’s most recent ministerial conference concluded with a few positive outcomes demonstrating that meaningful change is possible, though there were some disappointments. A successful agenda of reforms will require more members – particularly emerging markets and developing economies – to take the lead.
writes that meaningful change will come only when members other than the US help steer the organization.
STOCKHOLM – What will Europe’s growth trajectory look like after the financial crisis? For some Europeans, still nervous that their economies and banking systems might collapse, this is a little like asking a passenger on the Titanic what they plan to do when they arrive in New York. But it is a crucial question to ask, especially when Europe has been facing so much outside pressure from the likes of the United States and the International Monetary Fund to focus on short-term Keynesian stimulus policies.
True, things are pretty ugly right now. Europe’s income is projected to fall a staggering 4% this year. Unemployment will soon be in double digits throughout most of the Continent, with Spanish and Latvian unemployment on track to exceed 20%. Europe’s banking system remains sickly, even though many national governments have gone to great lengths to hide their banks’ woes.
Yet, ugly or not, the downturn will eventually end. Yes, there is still a real risk of hitting an iceberg, beginning perhaps with a default in the Baltics, with panic first spreading to Austria and some Nordic countries. But, for now, a complete meltdown seems distinctly less likely than gradual stabilization followed by a tepid recovery, with soaring debt levels and lingering high unemployment.
It is not a pretty picture. Some commentators have savaged Europe’s policymakers for not orchestrating as aggressive a fiscal and monetary policy as their US counterparts have. Why else is Europe suffering a deeper recession than America, they complain, when everyone agrees that the US was the epicenter of the global financial meltdown?
But these critics seem to presume that Europe will come out of the crisis in far worse shape than the US, and it is too early to make that judgment. An epic, financial-crisis-driven recession, such as the one we are still experiencing, is not a one-year event. So policymakers’ responses cannot be evaluated by short-term measures, either. It is just as important to ask what happens over the next five years as over the next six months, and the jury is still very much out on that.
America’s hyper-aggressive fiscal response means a faster rise in government debt, while its hyper-expansive monetary policy means that an exit strategy to mop up all the excess liquidity will be difficult to execute. Government spending in the US has risen in short order from 18% to 28% of income, while the US Federal Reserve has effectively tripled its balance sheet. Europe’s more tempered approach, while magnifying short-term risks, could pay off in the long run, especially if global interest rates rise, making it far more painful to carry oversized debt loads.
Subscribe to PS Digital
Access every new PS commentary, our entire On Point suite of subscriber-exclusive content – including Longer Reads, Insider Interviews, Big Picture/Big Question, and Say More – and the full PS archive.
Subscribe Now
The real question is not whether Europe is using sufficiently aggressive Keynesian stimulus, but whether Europe will resume its economic reform efforts as the crisis abates. If Europe continues to make its labor markets more flexible, its financial market regulation more genuinely pan-European, and remains open to trade, trend growth can pick up again in the wake of the crisis. If European countries look inward, however, with Germany pushing its consumers to buy German cars, the French government forcing car companies to keep unproductive factories open, etc., one can expect a decade of stagnation.
Admittedly, the past year has not been a proud one for policy reform in Europe. Recessions have never proven an easy time for European leaders to push forward with reforms. Matters were not helped when the Czech government lost a confidence vote midway through its six-month presidency of the European Union, leaving a lame duck European Commission. The shadow of forthcoming elections in Germany, together with concern over whether Irish voters will ratify the Lisbon treaty (giving Europe a badly needed new constitution), has conspired to impede reform momentum.
Yet Europe’s many strengths, including strong democratic governments and sound legal institutions, are often under-rated as long-term competitive strengths in today’s globalized economy. The recent recession has presented challenges, but European leaders were right to avoid becoming intoxicated with short-term Keynesian policies, especially where these are inimical to addressing Europe’s long-term challenges.
If reform resumes, there is no reason why Europe should not enjoy a decade of per capita income growth at least as high as that of the US. Moreover, with growing concerns about the sustainability of US fiscal policy, the euro has a huge opportunity to play a significantly larger role as a reserve currency.
One shudders to think what will happen if Europe does not pull out of its current funk. Certainly, Europe would lose traction as a badly needed counterweight to the US in world economic policy. Europeans may not mind this right now (one sees more Obama t-shirts in Europe than in the US), but they might not be so happy if a George Bush III comes along. Fortunately, Europeans will probably not wait so long to start moving ahead again.