U.S. Fears Economic Stimulus Measures Will Choke on Europe’s Drastic Budget Slashing

By: Money_Morning

Kerri Shannon writes: While U.S. President Barack Obama will be gunning for more economic stimulus measures at this weekend's Group of 20 (G20) meeting in Canada, European lawmakers continue drastic efforts to rein in spending.

The coordination of global efforts to promote economic recovery will be the main issue at the weekend's meeting, which was set to spotlight the value of China's currency before Beijing announced Saturday that it would allow the yuan to appreciate. The United States and Europe's differing views on the most effective strategies to maintain global economic growth and slash bloated government budgets are increasing tensions between leaders.

"There is a need to move toward rebalancing," Stewart M. Patrick, a senior fellow at the Council on Foreign Relations in Washington, told CNN. "But every country has different domestic political demands, and that is what drives decision making."

President Obama is worried that drastic austerity measures in Europe will choke global growth and collapse a fragile recovery.
"Our highest priority in Toronto must be to safeguard and strengthen the recovery," President Obama wrote in a letter to G20 leaders last Friday. "We worked exceptionally hard to restore growth; we cannot let it falter or lose strength now. This means that we should reaffirm our unity of purpose to provide the policy support necessary to keep economic growth strong."

With U.S. unemployment still hovering around 10% and state governments facing budget constraints and job cuts, President Obama sees economic growth as a higher priority than budget reduction.

"The economy is still struggling. There is not enough growth in the near-term to get the unemployment rate down," said Jeffrey Bergstrand, a professor of finance at the University of Notre Dame. "A [U.S.] focus on trimming the deficit is not likely to happen anytime soon."

Meanwhile, European leaders have taken the opposite approach to improve economic stability. The European Union (EU) addressed its desire for a coordinated exit from stimulus measures in a letter to G20 nations, acknowledging that different countries will require different timelines.

"Even though the timing, sequencing and scope of exit measures have to be tailored to conditions prevailing in the individual G20 members, coordination between governments can help to take into account possible spill-over effects."

Britain presented an emergency budget Tuesday that included cutting its annual deficit by $180 billion over the next five years and slashing spending by 25% in some government departments. The austerity measures are widespread and include cuts in public sector employment and salaries, public housing benefits, and disability allowances, an increase in sales and capital gains taxes, and a squeeze on the amount of taxpayer money Queen Elizabeth II receives.

Germany has outlined an $80 billion savings plan that Chancellor Angela Merkel said should set an example for other countries like Greece and Spain, which are in worse financial straits and expected to make even deeper cuts to protect the euro.

While President Obama will try to sway European leaders away from such sweeping measures, he's likely to be faced with staunch opposition.

Obama "has a point, but there are some countries that don't have a luxury of a choice, they have got to get a grip and start cutting quickly because the alternative of becoming the next Greece is not palatable to them," said Jonathan Loynes, chief European economist at Capital Economics in London.

The U.S. economic recovery in part relies on Europe's spending habits, but the EU's desire for stability and lower debt loads is taking a front seat to short-term growth. President Obama's appeals for stimulus measures have done nothing thus far to change Europe's strategy.

"The EU accords priority to budget-cutting because that is what its leaders believe is needed to preserve the euro and the political construction of a united Europe," Stephen Lewis, from London's Monument Securities, told the Associated Press.

Recent U.S. Stimulus Measures
Economists are getting increasingly concerned over President Obama's desire to spend more to encourage growth and lower unemployment. U.S. debt has hit about $13 trillion and 2011's budget deficit is heading toward $1.56 trillion.

"There has to at least be a plan for the U.S. being fiscally sustainable. It's amazing that we're lecturing Europeans on how to run their economy," said Thomas Cooley, professor of economics at New York University. "Europe is at least addressing its problems even though there is pain associated with that."

While imposing Britain-like budget cuts would be too drastic for the United States, economists have urged the government to refrain from additional stimulus measures beyond the $787 billion Recovery and Reinvestment Act of 2009.

Despite the addition of over half a million private sector jobs this year, unemployment remains at 9.7%, and President Obama has said progress is not coming as quickly as needed.

In a recent effort to spark job growth, Congress approved a $30 billion fund on June 17 to help banks lend to small business owners after receiving a written request from President Obama on June 12.

But economists are skeptical of the plan, saying the government hasn't fully grasped why small business lending is down so it can't outline a properly effective solution. The theory that more money in the banks will lead to more lending doesn't have supporting evidence, where as the real problem could be the business' lack of credit worthiness. Banks who receive the loans instead might choose to use the funds to cover losses, defeating the program's purpose.

Despite the uncertainty surrounding President Obama's stimulus tactics, the U.S. government has shown little sign of slowing down spending.

"I mean, there are mixed signals, and that's what generally happens in a recovery," David Axelrod, the president's chief political adviser, said on NBC's Meet the Press. "But we don't take anything for granted. We have to keep pushing forward, and we should not be careless about pulling out of our simulative efforts too quickly."

Source: http://moneymorning.com/2010/06/24/economic-stimulus-2/

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