In this must-read report from Brussels we see the clash of two big economic ideas, both in response to a time of global crisis. The U.S., represented by Treasury Secretary Jacob Lew pushes spending, while Herman Van Rompuy, president of the European Council urges austerity. Who is right?
Read this carefully. Austerity Wars are underway, the U.S. vs Europe, and the stakes are very high. Economic growth or fiscal frugality?
The question that Mr. Lew came to Europe to raise is how to strengthen the European economy — for the Continent’s sake, as well as for the global economy’s. The United States has an investment in Europe’s growth, American officials have said repeatedly, because of the deep financial and trade ties between the countries.
“We have an immense stake in Europe’s health and stability,” Mr. Lew said. “I was particularly interested in our European partners’ plans to strengthen sources of demand at a time of rising unemployment.”
The Obama administration has urged countries with stronger economies, like Germany, to slow their pace of fiscal retrenchment and ease off on demands for tougher cutbacks in hard-hit countries like Greece, Spain and Portugal. In the last few years, such advice has often fallen on deaf ears, given the political constraints in Europe and many officials’ belief in budget balance as a prerequisite to growth.
Mr. Van Rompuy mentioned the “vivid debate” over “fiscal policy and the pace of fiscal consolidation” in his remarks.
The new book by political economist Mark Blythe explores the history of the “myth”–or so he calls austerity.
From another vantage point, could another economic crisis of the past hold a useful lesson?
Tweak a few of the details and Mexico in the 1980s looks a lot like most Southern European countries today. In Mexico’s case, runaway government spending in the 1970s, fueled by high oil prices and greased by foreign debt, threatened to bankrupt the country after the Fed sharply raised interest rates to curb rampant inflation in the United States, increasing Mexico’s interest payments even as oil prices crashed to earth.
Similarly, money poured into Spain and Greece when investors persuaded themselves that the bonds of all members of the euro zone should be as safe as Germany’s, the region’s most creditworthy country. In Greece, this allowed a government spending binge. In Spain it ignited a housing bubble. Both countries were left with an unbearable burden when the world economy hit a wall, creditors took flight and the money stopped.