United States vs. European Union: Who Games the Crisis Better?

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.

Comments

[Karl Glazier:]

This is like 1932, when governments worldwide were afraid of deficits. The conservative attitude is always "Let's not try anything new, we are so afraid something might go wrong."
And the depression got deeper and deeper, and led to Hitler.
He did massive Keynesian deficit spending and Germany was the first country in the world to achieve full employment in 1936 after 33% unemployment in 1933.
That was the major reason he could stay in power despite being an obvious madman.

Jun 12 02:13 PM

[Dave Wrixon:]

As much as the EU have tried to screw things up, I am afraid they have been totally out classed.

Jun 12 02:18 PM

[Dave Wrixon:]

"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."

This model won't even fly!

Perhaps Bernanke should watch some of that black and white footage of the early would be aviators.

Jun 12 02:22 PM

[PastTense:]

"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:"

But note that just a few days ago,
"Standard & Poor's has downgraded the UK‟s credit outlook from “stable” to “negative” for the first time since it began assessing our finances in 1978"
seekingalpha.com/artic...

Jun 12 03:00 PM

[Livinjay:]

The E.U. is determined to not run up massive debts, or incur high inflation in the future...

As far as I know, the ECB is not allowed to run up massive debts, or engage in QE, it simply does not have the political authority to do so. If this is the case, than the EU is not behaving in a fiscally conservative manner because they feel it is the best choice available in the long run, but intstead because it is the only option currently available to the European Union.

Jun 12 04:04 PM

[nobby73:]

I've been lucky enough to see both sides up close and I am not seeing the evidence that the US is in better shape that the E.U. I do think that US economists think their country is in better shape that the E.U. economists do theirs, but I put that down to the natural optimism of Americans versus pessimism of Europeans.

Clearly, you can say that the U.S. banking system is in a better position relative to the start of the year than the European system, but this is because the risk has been to a large part transfered to the Treasury and to the Fed. This has bought the US economy time, but how this plays out in the coming months and years is less clear to me.

However, I do think that the solution being applied to the US and also the UK is as a consequence of the specific problems of those economies - highly concentrated on consumption and with a much higher level of personal debt, both secured and unsecured. The dangers to the functioning of society of sustained deflation are therefore far more severe, which means they have little choice but to take this route. I am not convinced they want to rein in inflation, but we will see.
In Europe the problem is very different depending on the region, but the need to protect the stability of the Euro is crucial and the social safety net is far better, so the belief is prudence and not building up huge debts which will force inflation is the German view, which is winning out. However, doubts are creeping in. The woeful industrial production figures are raising questions whether the export model is really sustainable, especially if the developing world begins to catch up in production quality.

Somethings are very clear to me though - if you are going to be poor, old or sick, you want to be living in Europe. If you are young and middle class, you want to be living in Europe for the quality and cost of your education.

Jun 12 04:57 PM

[sunnsea:]

If it is all that bad in the EU, why are all the lines in your chart moving steeply upward in the last few months?

Jun 13 09:14 AM

[1RuleNoRules:]

What I don't get is why didn't any nation dramatically cut spending and top tax rates as a stimulus. Especially when cutting top tax rates have been the most successful method in recent history to stimulate growth(and reduce deficits).
Test tubes like this don't come around often and no one tried the tried and true.

Jun 13 11:19 AM

[Ferdinand E...:]

The recovery of the UK is more advanced than .... Please, you are dealing with intelligent people now. The UK prime minister is a complete ignoramus. And listen readers, Brussels does not determine policies for the countries that were dumb enough to vote themselves into this 'union'. Here in Sweden we are independent of Brussels in economic matters, but unfortunately the Swedish government is even more ignorant than the one in Brussels.

Jun 13 11:50 AM

[Jade Queen:]

Maybe China is the best place to get a good education, if it's economics one is interested in. I say this because when students there are told silliness with a straight face, they grace it with proper seriousness and laugh out loud. The U.S. is not good, recently, at carry-through with wild, ingenious, and crackpot ideas. Nonetheless, the U.S. is good at generating ideas that are outside traditional boxes. The U.S. is a place where talk of tradition would entail asking, "Which ones?" It remains for other places to take care of application, fabrication, bookkeeping, and accounting. The U.S. does not seem to be good at honest models of these processes, brief interest in fab labs notwithstanding. U.S. geniuses like Demming seem to be honored more off-shore than on. Sometimes good ideas have to go around the world before they can get honored in their homelands. I remember telling a Chinese medical student you could get $65 per hour (in 2001, more now) for acupuncture in the states. The dropping of jaw and widening of eyes were priceless. Western fascination with traditional Chinese art and medicine may have saved some valuable knowledge that was at risk of being lost in the 50's. Similarly, the Chinese fascination with western concepts of science seem to be in some ascendance there now, even if traditional Chinese processes are kept around as something of an anachronism with which to entertain and entice tourists. I didn't even know there was a Buddhist fiery underground until I saw some fantastic depictions of it in China. When Eisenhower determined to connect ordinary people so as to undercut the imperial military machine, I think he had some success with that. Ordinary people in the world are becoming jaded enough to undercut fearmongering by war profiteers. I was entertained when a Pakistani diplomat was asked about corruption there. His answer was a polite version of, "You're kidding, right?" The U.S. has been outed as surely the most inventively corrupt place on the planet, what with Cheney et al. At least that's my story, and I'm sticking to it. I want what investments I have to be of some use in the new paradigms (I liked this paradigm concept, what decade was that?), so I hold renewable-energy stocks, mostly solar and geothermal. Shipping black goo seems anachronistic to me when there are good German designs for passive houses, good Dutch designs for storing heat and cool in the earth, and so on.

Jun 13 03:01 PM

[Old Trader:]

Livinjay,

The primary difference between our Fed, and the EU's ECB (European Central Bank) is that the Fed has 2 mandates, to control inflation and to promote "full employment", which can be two conflicting goals, especially in times like this.

In contrast, the SOLE mandate for the ECB is controlling inflation.


On Jun 12 04:04 PM Livinjay wrote:

> The E.U. is determined to not run up massive debts, or incur high
> inflation in the future...
>
> As far as I know, the ECB is not allowed to run up massive debts,
> or engage in QE, it simply does not have the political authority
> to do so. If this is the case, than the EU is not behaving in a fiscally
> conservative manner because they feel it is the best choice available
> in the long run, but intstead because it is the only option currently
> available to the European Union.

Jun 13 07:34 PM

[untrusting ...:]

Some claim, but where's your information to support that?

According to the information I recently saw the following is the big picture in the US now:
1) top 1% owns 35% of all household wealth, and 56% of all stocks.
2) top 20% owns 85% of all household wealth, and 85% of all stocks.
That leaves the remaining 80% heavily in debt and just trying to survive. Is it any wonder the US is in the debt quagmire they are in today?

Keep in mind Plutarch's famous observation from the ancient Greek and Roman days .... "An imbalance between rich and poor is the oldest and most fatal ailment of all Republics".

So the point is, if you reduce taxes on the wealthiest 20%, where are you gonna get any type of government tax revenue as the remaining 80% don't have anything except basic survival as it is. As it is now, payroll taxes, medicare taxes, unemployment taxes and the like already take up far more of the 80%'s relative income than they do of the 20%'s relative income. With regard to government spending... why not just cut it all. We don't need firemen, policemen, water systems, dams, schools, roads, bridges, airports, garbage collection, military defence, ports, or any of those other things government pays for.

But then if you have real solutions to any of these major problems in the US, you could always get elected and lead the way out of this titanic mess the US is in today.


On Jun 13 11:19 AM 1RuleNoRules wrote:

> What I don't get is why didn't any nation dramatically cut spending
> and top tax rates as a stimulus. Especially when cutting top tax
> rates have been the most successful method in recent history to stimulate
> growth(and reduce deficits).
> Test tubes like this don't come around often and no one tried the
> tried and true.

Jun 13 09:53 PM