U.S., European policies diverge

The 16-nation euro currency zone is beset by fissures between strong economies such as Germany and weaker ones such as Greece, Ireland and Portugal, which risk being engulfed by historic levels of government debt.
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.

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