Should Europe Emulate the US?
23 November 2012
BRUSSELS – Paul Krugman, the Princeton University economist and blogger, recently summarized diverging transatlantic trends as follows: “Better here, worse there.” It is a shocking observation: as recently as in 2009, European politicians and commentators lambasted the US for being at the root of the financial turmoil and hailed the euro for protecting the continent from it.
Unfortunately for Europe’s boosters, the facts are unambiguous. According to the European Commission, US per capita GDP is expected to return to its 2007 level next year, whereas it is expected to remain 3% below that level in the eurozone.
The one area where Europe is posting better results is public finances. In 2012, the aggregate fiscal deficit in the eurozone is expected to be slightly above 3% of GDP, compared to more than 8% in the US.
President Barack Obama’s administration and the US Federal Reserve gave priority to healing the private sector. After expeditiously restoring confidence in the banks by forcing them to undergo severe stress tests, they gave households time to repair their balance sheets. The task for economic policy was to compensate for the resulting shortfall in private demand until households eventually recovered. Fiscal consolidation was put on hold (although some did occur, owing to the balanced-budget rules of most US states), and monetary policy was geared toward flattening the yield curve.
Households were assumed to be ready to consume, although, in Spain and elsewhere, many were over-indebted. And labor-hoarding was encouraged at the expense of productivity and profitability.
Neglect of the private sector has left Europe in a sad quandary. On the supply side, permanently lower output makes fiscal adjustment even more compulsory; but, on the demand side, a weak private economy lacks the resilience needed to weather fiscal retrenchment.
Jean Pisani-Ferry is Director of Bruegel, the Brussels-based economic-policy think tank, and Professor of Economics at Université Paris-Dauphine. He was an adviser to the European Commission’s Directorate-General for Economic and Financial Affairs, and was Director of CEPII, France’s leading international economics research institute. He has also served as Senior Economic Adviser to the French finance minister, Executive President of the French prime minister’s Council of Economic Analysis, and Senior Adviser to the director of the French Treasury.