Europe versus The U.S.

By Jeff Harding

France and Germany seem to be coming out of their recession as they both posted GDP gains: France by 1.3% and Germany by 1.4%. Of course these data may be suspicious but for the moment they appear to accurate.

Let me take you back to March of 2009 and the G20 conference when Treasury Secretary Tim Geithner and Presidential Economic Advisor Larry Summers admonished the Europeans to engage in much larger fiscal stimulus efforts like the U.S. to synchronize a worldwide recovery.

Lawrence Summers, senior economic adviser to Barack Obama, US president, told the Financial Times recently that the Group of 20 countries should agree to boost government demand. On Monday Christina Romer, chair of the White House Council of Economic Advisers, said: “The more that countries throughout the world can move toward monetary and fiscal expansion, the better off we will all be.” …

European ministers said on Monday they had no plans to add to recent fiscal stimulus packages despite calls from the US for radical expansions in government action to boost ailing economies. …

Jean-Claude Juncker, chair of the “eurogroup” of ministers, said: “The 16 finance ministers agreed that recent American appeals insisting Europeans make an added budgetary effort were not to our liking.”

The best of European leaders, Chancellor Angela Merkel made very perceptive comments:

She is sceptical about calls for bigger public deficits and looser monetary policies – the very things that tipped the world economy into the abyss in the first place – as the way out of the crisis.

Chancellor Angela Merkel

“The crisis did not take place because we were spending too little but because we were spending too much to create growth that was not sustainable. It isn’t just that the banks took over too many risks. Governments allowed them to do so by neglecting to set the necessary [financial market] rules and, for instance in the US, by increasing the money supply too much.”

[Mrs. Merkel] is robustly unapologetic when discussing the origin of the global financial meltdown. The fault, she says, ultimately lies with misguided efforts in the US, both by the government and the Federal Reserve, to re-start artificially the economy after September 11 by pumping ever-cheaper money into the financial system. “We must look at the causes of this crisis. It happened because we were living beyond our means. After the Asian crisis [of 1997] and after 9/11, governments encouraged risk-taking in order to boost growth. We cannot repeat this mistake. We must anchor growth on firmer ground.”

Wow, I wish she would run against Obama. I do not believe that fiscal stimulus has any lasting effect on an economy and that it is harmful in that it results in large national debt and actually retards long-term growth. But, France and Germany enacted rather modest stimulus. According to the IMF Germany’s stimulus amounted to 1.5% of GDP and France’s .07% of GDP. The article claimed that the U.S.’s stimulus amounted to 2% of our GDP but that is quite inaccurate. If you look at total commitments to spend, the U.S. pledged about $11.6 trillion (about equal to GDP) and had committed about $3.8 trillion at the time of the G20 meeting. So, if my math is correct, and assuming our GDP will be in the $13 trillion range in 2009, our stimulus was about 25% to 29% of GDP.

So why is Europe getting so much bang for the Euro? They aren’t. The stimulus doesn’t have anything to do with their recovery. The fact they are recovering faster than we are is more likely due to the fact that they resisted Geithner’s and Summer’s arm-twisting to increase spending. Merkel knew well that piling up more debt would only harm the German economy. They are still seeing deflation. In July prices declined 0.7% from a year earlier and in June, prices fell 0.1%, the first annual decline in the EU currency bloc’s ten-year history. What they are seeing is a normal recovery which is what a recession brings about when the government engages in a more hands off policy.

I believe calls that the recession is over are very premature. The Europeans are still encountering the same things we are, including rising unemployment. But, my bet would be on Europe to recover before the U.S., assuming they don’t engage in more stimulus foolishness.