Friday, July 29, 2011

Which Is Bigger Problem US or EU economy?

Both the US and EU economies are facing great difficulties at the moment.

The US is struggling from both slow recovery (problems US) and a budget crisis. (see: Why US is facing budget crisis?)

However, I feel the US problems are solvable, if the political will is there. Before the political impasse about raising the budget ceiling, bond rates on US bonds were near historical lows. The US was (and still is) in a position to allow a degree of monetary and fiscal stimulus whilst working on long term budgetary changes to deal with the growing entitlement spending in health care and pensions.

With its own currency and monetary policy, the US has the capacity to absorb current difficulties and return to moderate growth. The next few years will not be years of boom and great prosperity, (it never is after an asset bubble and bust) but it is still in their own hands.

Unfortunately, political ideology is making it difficult to agree on sensible policies which would enable long term structural deficit reduction without harming short run recovery and benefifical capital investment.

The EU situation is grave, and they are really hamstrung by the institutions and implications of the Euro

EU leaders talk as if the crisis was solely due to budget deficits. But, in a single currency with common monetary policy, austerity policies to deal with budget deficits haven't worked because there is no outlet to enable the economy to recover. The problem is much more than budget deficits. Budget deficits are more a sign of what is wrong.

Struggling economies like Greece, Ireland and Portugal and trying to solve their problems by mainly relying on deflationary spending cuts, but this is aggravating the long term unemployment in the EU and in the case of Greece singularly failed to prevent an inevitable default.

Many member countries are realising that being in the Euro with a single currency is a big mistake. (Two speed Europe)
  • The EU is not prepared for the necessary fiscal transfers (for obvious political reasons).
  • There is not sufficient geographical mobility for variations in demand.
  • The economies of southern Europe are definitely not harmonized with northern Europe.
But, despite all the problems the Euro is creating, there is no way out. You don't want to be in the Euro, but once in, it's difficult to leave. Politicians are just left with wrangling over debt default and how many layers of spending cuts to implement on their public.

I would really hate to be a finance minister for economies in the Euro - it's just very difficult to see what they can do to turn the economy around.

But, if there was a US president (who had the support of Congress) the economy could definitely be turned around and a debt crisis avoided.

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