As if the diplomatic spat over Iraq weren't bad enough, relations between America and Europe are being slowly poisoned by divergent economic policies. Indeed, the differences between the two sides' economic strategies are as sharp as they have been in two decades.
At first glance, the depth of this ``policy gap'' seems surprising. The economic outlook for the rest of this year and for 2004 has improved recently both in the US and Europe. Moreover, the US and Europe face a similar challenge: encouraging economic recovery. But their governments' actions--or lack of action--make it seem as if neither side can see the problems faced by the other.
When the Euro was introduced, most EU members--Germany, in particular--looked forward to managing their economic policies with more autonomy and less US pressure. Thus, today's framework in Euro area, with its unique mix of joint monetary policy and national responsibility for fiscal policy, was not constructed to facilitate macroeconomic coordination with the US.
But the perception of many American observers was different. They saw the central implication of the Euro as requiring Europe to junk its supposed role as a ``free rider'' in the international economy, one that left the US shouldering the burden of policy adjustments to promote global growth. Europe would inevitably be forced to coordinate its policies with America.