U.S., European policies diverge

By Howard Schneider
Washington Post Staff Writer
Wednesday, December 8, 2010; 9:30 PM

Even as President Obama detailed this week a sweeping deal on tax cuts that would add hundreds of billions to the nation's debt, European officials were pushing ahead with a sometimes draconian round of spending cuts, tax increases and other government belt-tightening.

Both strategies were being pursued in the name of economic growth. Can both be right?

The debate - whether to stoke immediate growth with public money or crack down on spending to restore longer-term economic health - has become one of the central discussions among the world's economically advanced nations. The consequences of this debate are great for economic recovery on both sides of the Atlantic.

European and U.S. policymakers and officials at organizations such as the International Monetary Fund agree that countries seeking to nurture a weak recovery should tailor what they do to fit their circumstances. Some nations will need to retrench even as others should continue spending.

Still, not all policies have been received with the same warmth. Although there has been modest criticism of the United States - Germany, in particular, has complained that U.S. officials overlook the long-term toll of mounting debt and loose money - the doubts about Europe are weighing heavily.

The recent $110 billion bailout of Ireland amplified what analysts say is an underlying risk: that many European countries might be saddled with slow growth for years to come and face wrenching social choices. The wider European economy could confront an era of successive crises.

Concerned that a weakened Europe could undermine the health of the world economy, the Obama administration dispatched Lael Brainard, Treasury undersecretary for international affairs, to Europe last week to consult with leaders there. U.S. officials have consistently urged Europe to act more quickly to address the threat of insolvency facing weaker countries.

In successive speeches this week, IMF Managing Director Dominique Strauss-Kahn joined the criticism, calling Europe's efforts to date "piecemeal" and saying policymakers needed to agree on a comprehensive set of policies to revive growth.

"The situation in Europe remains troubling, and the future is more uncertain than ever," Strauss-Kahn said Wednesday in Geneva.

By contrast, even some of those who have been wary of U.S. policies agree that the U.S. recovery is central to the world's economic health and needs to be kept on track, even if it means running larger deficits. As the world's largest economy, there is little short-term risk that the U.S. will be unable to borrow what it needs.

When European economists at the Organization for Economic Cooperation and Development recently assessed the U.S. Federal Reserve's decision to pump money into the economy, they said they were skeptical it would help. But they endorsed the move on the chance that it could.

There's less acceptance among economic analysts and investors that Europe is doing all it should, and with the necessary speed, to avoid the type of crises that forced Greece and Ireland to request international help. Even more fundamental is whether the economically weaker European countries - particularly among the 16 that share the euro as a currency - can become more competitive and rekindle growth.

The list of issues is daunting. Growth is slow not just because of the recent recession or the subsequent problems that hit Greece and Ireland because of their high levels of government debt. It is also hampered by a complex set of legal, regulatory and social problems that may need several years to fix.

Bondholders face the prospect of a default in what had been considered a risk-free European market; taxpayers are being asked to pay more and forego benefits.

"You have these looming controversies that are fundamentally about distribution. Promises were made that cannot be kept. Who is going to pay the price for that? That is what gives this debate a sharp edge," said Ed Clark, chief executive of Canada's Toronto Dominion bank, who is closely watching developments in both the U.S. and Europe.

The politics are difficult, and the process byzantine - involving national governments and opposition parties that span the spectrum from conservative to socialist, institutions that answer to the 27 nations of the European Union, and others that only serve the 16 nations of the euro.

Within the euro zone, common ground can end at the printing presses of the European Central Bank. The countries share a currency, but there is persistent division between better-performing nations that don't want to subsidize their less-successful neighbors on an ongoing basis.

The ECB is trying to bridge the divide but can go only so far. While independent, the central bank is influenced strongly by European fears of inflation. Unlike the U.S. Federal Reserve, the ECB does not have an explicit mandate to boost employment and can't as easily pump hundreds of billions of dollars into the economy like the Fed can.

When European leaders met in Brussels this week, they affirmed their basic approach to the recent crises and under German insistence officials decided they would not expand their bailout fund - a step that market analysts say is needed to build confidence.

Executives from major U.S. firms such as bond company Pimco, top economists and European analysts, as well, concur that European leaders have yet to make clear their "end game." For instance, how will the extensive actions underway - including budget cutting in Greece and Ireland, bank restructuring in Spain and debate over new rules for government bond sales - avoid years of crisis management and a possible breakup of the euro zone.

"What you are looking for is growth. That is not happening," Uri Dadush, head of the European Program at the Carnegie Endowment for International Peace, said this week at a forum on Europe's problems organized by the Ogilvy marketing firm.

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