Rift and Mastery

PARIS – Like brothers in arms united in combat but divided in peace, Europe and the United States, which had fought depression jointly in 2009, started voicing disagreements in 2010 and begin 2011 with divergent positions on macroeconomic policy. The price of divergence could be steep: though the worst is over, effective coordination of policy is still needed at a time when rebalancing the global economy, as the G-20 has called for, is far from being accomplished.

The transatlantic divide is evident with respect to monetary policy. In November of last year, the US Federal Reserve’s decision to launch a new cycle of “quantitative easing” (buying up government bonds through monetary creation) triggered fierce criticism in Europe. While the European Central Bank has also been buying government bonds since last spring, the amount is relatively small (€70 billion, compared to the Fed’s $600 billion program), and is meant only to support troubled eurozone members, with particular care taken to avoid any impact on money supply.

A similar divergence, though less acute, has appeared with respect to fiscal policy. In December, as Europeans shifted towards fiscal rigor, the US Congress extended for two years the tax cuts initiated by George W. Bush – which almost everyone interpreted as yet another effort to boost the US economy. True, fiscal retrenchment in Germany is more cautious than official rhetoric suggests. But, overall, the eurozone and Great Britain have clearly shifted towards austerity, which the US is still very reluctant to consider.

In Europe, this divergence is often attributed to what French President Charles de Gaulle used to refer to as America’s “exorbitant privilege”: the power to print the principal international reserve currency. But this explanation is only partly satisfying. Yes, China does pile up reserves in dollars. But no one forces it to do so, and the US would much prefer a stronger renminbi. Emerging-market countries could also invest in euros, if only they were offered such liquid assets as US Treasury bonds – therein lies the current debate over the proposed creation of “eurobonds.” And, while countries like Greece and Spain suffer from market constraints, such is not the case for Northern Europe.