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Why Europe is Fiscally Conservative

Numerous US politicians, pundits and bloggers complain that Europe (especially Germany) is once again free riding on the United States. This time we are accused of refusing to carry our share of the global economic burden by failing to increase the stimulus to a gazillion euro. We are supposed to throw in the kitchen sink as the Fed did and follow yet another one of Washington's "shock and awe" strategies since the one in Iraq was so successful.

Europe responds with yet another metaphor: Czech Prime Minister Topolanek, who currently heads the EU presidency, called President Barack Obama's stimulus plan "a road to hell." Yep, he attended an AC/DC concert the week before.

It's time to cool down and read James Surowiecki's excellent explanation in the New Yorker (HT: Ben Perry), why the United States needs economic growth more than Europe does. And therefore "it is not surprising that we [=the United States] are going to be the ones who end up paying for it."

I am tempted to call this post "Americans are from Venus, Europeans are from Mars" because the transatlantic buddies seem to have swapped their preferred positions. As Surowiecki explains:

In American politics, "Europe" is usually a code word for "big government." So in the midst of a global recession, with the U.S. and China shelling out trillions in fiscal stimulus, you might expect that European governments would be spending furiously, too. Far from it. While the U.S. is devoting almost six per cent of its G.D.P. to fiscal stimulus, France and Germany are spending a barely noticeable twenty-six billion euros and fifty billion euros, respectively. Whereas the U.S. hopes that the upcoming G20 summit will lead to a global stimulus package, European policymakers have been warning against the dangers of "crass Keynesianism." The U.S. Federal Reserve has been flooding our economy with money, but the European Central Bank has cut interest rates slowly and reluctantly. Far from wild-eyed leftists, Europeans are looking downright conservative.

Yep, Europe is now sooo conservative that even the Wall Street Journal agrees with us now: Old Europe Is Right on Stimulus. Surprise, surprise.

What do you think? Do we have to swap the stereotypes of Europe and the United States? Is Europe once again piggybacking on the US? Or is US policy just making everything worse for the long run?

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Pat Patterson on :

Uh, that was a "...highway to Hell." Maybe PM Topolanek was channeling Bishop Bernard who probably was the first to note that good intentions can lead to Hell. But I think that Europe has stumbled on to a truism of finding virtue in its inability and having no stomach to create the kind of stupid stimulus packages our own retread FDRs are attempting. But I am concerned that the current high tax rates of many of the bigger EU economies simply don't give them any flexibility in acting not fiscally but monetarily. When you are already spending pretty much all the excess capital in the system printing more will simply create inflation that will make some people nostalgic for the days of the Weimar Republic. While the US has, not necessarily should, the ability to raise taxes and forgo a monetary solution. Even though I would prefer the latter.

Don S on :

"Czech Prime Minister Topolanek, who currently heads the EU presidency" That was a great quote, Joerg, but you failed to mention the punch line. That is the fact that the government PM Topolanek heads just lost a vote of confidence in the Czech parliament. So how are those economic recovery plans working out in the Czech Republic, Mirek? Do you suppose that the Czech people might be planning a reprise of the Defenestrations of Prague? Such plans can make politicians nervous. Mirek is not fortunate enough to be in Germany, poor chap.

Marie Claude on :

Pravda is laughing http://ow.ly/1xg7 and Angela sais no to Obama/Gordon http://www.rightpundits.com/?p=3590

Marie Claude on :

oola ! it's going to a global attack on dollar http://www.taipanpublishinggroup.com/dump-the-dollar.html?gclid=CNryg8bvx5kCFRMUagodZgretg

Don S on :

Marie-Claude, the dollar has been overvalued since the economic crisis hit last year. Overvalued even against the humble pound. Last summer the pound traded at about $2. That fell to around $1.35 last month, but the pound has risen to $1.45 since then. This is actually good news for the US, not bad as you seem to believe. When the dollar falls US exports become more competitive and foreign imports less attractive to US consumers, so the trade balance improves.

Marie Claude on :

uh, what do they export apart musics and arms (?) now ? Chineses makes the rest :lol:

Joe Noory on :

Though there is a trade deficit, it would seem quite [url=http://www.census.gov/foreign-trade/statistics/product/enduse/exports/c4279.html]a bit[/url].

Marie Claude on :

I can't believe it, LMAO, these are transactions through the wallstreet system, and don't mean that they were destinated to France in their final race : transit to EU, to Africa... I have seen a report on TV on how work our nowadays agricultors, PC connections to the mondial Markets prices I don't think that France need corns, she is the first exporter in EU, idem stuffs for plane industry, in the contrary Boeing is composed with an extensive number of french and EU pieces.

Joe Noory on :

Whether your opinion is that they need them or not, that is the data I found. You appear to not know the difference between an opinion and a fact, which makes you seem as much of a waste of time as "YL" who uses about 30 different names and invents imaginary dramas between the readers here. I'm not going to spend any more time paying attention to your strange comments or try to interpret your awful english.

Honza on :

To be honest it was a government based on bribes and very thin majority. After election, there was a 100:100 situation in parliament, 4 or 5 months later two "constructive" (probably bribed, but situation in their party is really totalitarian, so *maybe* it wasn't bribe.. at least none has been found so far) MOP decided to switch sides under few condition on passed laws. You wouldn't believe what was going on here (bribery, blackmailing, justice system kicked in the nuts so one MOP could go on)... disgusting. And there is nothing we can do. We have tried to elect new party to parliament (successfully), but they are same crooks as the rest of them.

David on :

The New Yorker article provides a clue as to Europe's relatively sanguine response to the economic crises (at least so far): "In addition, since most European countries have an elaborate social safety net, a recession has a less dramatic impact on people’s daily lives. In the U.S., unemployment insurance pays relatively little and runs out relatively quickly, so losing a job usually means a precipitous decline in income. ...Furthermore, universal health care enables Europeans to see a doctor even if they’re out of work." So far, we haven't seen in Europe the Hoovervilles - or rather, [url=http://www.youtube.com/watch?v=yz8LXq1q6iI]Bushvilles[/url] that are springing up outside of nearly every American city.

Don S on :

David, those indefatigable journalistic gumshoes at the NYT apparently limited their journalistic efforts to German - quite possibly to Berlin. Before assessing the success or failure of Europe's social selfare system I would have supposed that the hallowed Times would dig a little deeper, perhaps visit a few countries who have been really suffering from the crash. In Eastern Europe, but not limited to Eastern Europe. Iceland, Ireland, parts of Spain. Problem is the journalistic hounds of the NYT sometimes better resemble lap-dogs. Like the Queen's Corgis.....

Pat Patterson on :

I thought that, according to George Galloway, only certain Middle Eastern dictators could be termed indefatigable?

Joe Noory on :

While your message seems to revolve around wanting to demonstrate to yourself a reason to destest you countrymen, dreaming and hoping for "Bushvilles", you seem to have lost track of the topic. They're called [url=http://www.20minutes.fr/article/136634/Paris-Le-bidonville-de-Bobigny-rase-de-la-carte.php]Les Bidonvilles[/url] in some corners of EUtopia.

Solipson on :

Bidonville is the french word for slum, nothing else. The article you mention is about Eastern Europeans setting up shop in France. Not quite Americans living in tents in America. Don: The article is in the New Yorker not the NYT, you might want to rethink your comment:-)

Marie Claude on :

"Eastern Europeans" What an euphemism, they are gypsies ! not quite the kind of customers that Joe would choose, though he is the first to slam us with a supposed subhumans inhabitations, LMAO Eh Joe, who is whinning at the moment ? your president ! say, he wants that france and Germany bail him out ! oh I forgot, his poodle too LMAO BTW, O must have some convenient entrees in the IPOD stores, that's what he brought ot the Queen too LMAO, and guess what the Queen gave him back ? her portait !!!!!!

Pamela on :

Oh, there you are! Marie Claude, I have missed talking to you. I've had a bit of a problem with one of my eyes that is just beginning to get better and has precluded my use of the computer. But it's getting better and I have missed your sass so here I am. So. "Eastern Europeans" in the cultural vernacular of the French (or just you?)does not include Ukraine? In your cultural world 'Eastern European' is a euphimism for 'gypsies'? Are we missing something? I had - how shall I say - an enlightening - experience with gypsies when I was in Spain in 1982. It was not pleasant. In other news, can we talk recipes? (Joerg, don't hate me - I love French cuisine - it's hard enough finding someone who actually lives the stuff. I read Escoffier as though there is a plot. Come to think of it, there is.)

Anonymous on :

Hi Pamela : I missed your enlightened comments too :lol: "So. "Eastern Europeans" in the cultural vernacular of the French (or just you?)does not include Ukraine? In your cultural world 'Eastern European' is a euphimism for 'gypsies'? Are we missing something?" uh no ! I was adding a precision about the people that Joe was mentionning in his link, eh since our borders are opened with the eastern front, we are invaded (the western continent) with "nomadish populations", the trouble is that that they are not looking for jobs, but for all sorts of traffics, If they were musicians, We wouldn't mind, but they exploit their children skills for looting I had - how shall I say - an enlightening - experience with gypsies when I was in Spain in 1982. It was not pleasant. Actually, in Spain they are integrated in the economical develeppement, they are working as stores owners or streets markets owners... those who are looting there are illegals, my man has his wallet robbed last year in a supermarket by illegal africans "In other news, can we talk recipes?" recipes ? I don't make the cooking, shall I introduce you my hubby ? :lol:

David on :

"While your message seems to revolve around wanting to demonstrate to yourself a reason to destest you countrymen, dreaming and hoping for "Bushvilles"" Best not to drink and comment....

Don S on :

"Yep, Europe is now sooo conservative" I would call Europe conservative in any real sense. The meaning of 'conservative' is conserving the society. The free-wheeling gambling bankers of 2006 may have thought they were conservative, but were not. They were radicals. But compared with a society which produces many fewer children than needed to maintain it's numbers for 30 years or more, those stupid bankers are veritable mossbacks. A society whose women bear fewer than 1.5 children each is the most radicl of all because doing that means that without doubt that within two generations the society will be virtually unrecognizable to itself. No, in this sense (and others) Europe is amazingly radical. Europe is unprecedently radical in another sense. The proposed regulation of world financial markets which Sarko and Merkel are 'demanding' the world adopt is nothing less than a demand that the structure of world capital markets be reformed to make the world safe for German pensioners - no other considerations allowed. A banking system for a young country is necessarily much different than one for a society of pensioners - the Merkel-Srko plan seems intended to force the entire world to adopt a system designed for the needs of a generation of childless aging 68'ers. It won't be adopted, and if adopted, will not work. Nevertheless 'Europe' seeks to make the world over in it's own image. So does the US, of course, but the US vision has the minor virtue that the demographics of the US are much closer to the average demographics of the world than Europe's are. Nevertheless European critics are entirely correct that the world financial system ought not be designed to US specifications. If Europeans could make the further leap that designing the system to European specifications is at LEAST equally misguided they would be onto something.....

Marie Claude on :

how many kids do you have ?

Solipson on :

Don, I don't think they (Sarko and Merkel) have a blueprint for a new world financial system. Hedge funds, offshore heavens and the like have not a lot to do with the current financial crisis. The two are just settling old scores and who would mind them not to? The successor poodle and his stateside friends just laughed at them for years, when they warned about unregulated structured products. It is time to get even. I would do the same. I would tell the poodle poodle and the rest: Just you shut the fuck up. You screwed up, you have not the singlest shred of credibility in things regarding financial regulation. We talk now. Which I think is basically what's happening. By the way, linking the demographic situation with the right to demand financial regulation is a bit far fetched. The German pension system is in large parts not capital based but pay as you go. Therefore the financial world has virtually no impact on it. In addition the public banks have a market share of about 67% percent. (The German Sparkasse, would it be one entity, is, with assets of about € 2,5 trillion by far the largest bank in the world.) They don't have to make profits, therefore they are conservative by nature.

Marie Claude on :

UMMM, our sparkasse has been regrouped with the popular bank, so that makes it like a normal bank as far fonctionning Also as far as world banking goes, the City of London was/is by itself a "paradise" for AQ money, Hamas, Iranians... all nice peple that the American state department want us to boycott ! Americans who wanted to escape from their taxes administration too ! so I'm not wondering why the both countries have some common interests in willing to survive

Don S on :

Soli, I'd be surprised if they did have a cunning plan. Problem is that financial systems have more than one party, they have to make sense for both sides or they don't work. It's bad enough trying to regulate such a system within national boundaries, much less try to regulate internationally, which is what is proposed. Banking systems are basically a way for the old and rich to lend to the young and the poor, for a profit of course. The more rigid the standards the smaller the return to the rich and the less credit available for the poor. Make the regulations too stringent and two things will happen: Some capital will escape the regulatory net, through the Grand Camans or the like, and regulators will have little control over that capital. 'Law-abiding' capital often have incredibly low rates of return historically. After the Dutch 'Golden Age' most Dutch investors had average rates of return on capital of 1-2% for more than a century. In theory this kept the capital safe, but actually not; there are 'black swan' events (like WWI or the Great Inflation) which can and do sweep away even the seemingly most conservative of systems. Many people think the lesson that Madoff taught us it to avoid theifs, but the real lesson is that steady returns are not possible in the system above a pretty low level, and beware the investment firm who tells you otherwise - they are lying. The business cycle drives returns, and the nature of the business cycle is that some years you will make 25%, but about once a decade you will make a loss, perhaps a big ones, and other years you will make 2%. About once every 60-70 years you will lose your shirt, and that is without factoring in black swans like major wars, etc. Merkel seems to believe that she can eliminate risk by regulation without hurting returns, much, but the iron law seems to be that real returns demand tolerance of real risk; the trick is to maximise the first while minimizing the last. That's why it won't work.

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