Europe

American economic intelligentsia has been hammering the European governments for weeks on their “weak” economic stimulus proposals. Time and time again, they are told that the current spending programs are not enough to revive their stagnant and contracting economies. So far, they are barking up a deaf tree. Lead by Germany’s impassive Angela Merkel, Europe has so far given America the hand.

Why has Europe so stubbornly resisted America’s call for more stimuli? Furthermore, why the apparent reversal of roles? The American government has played the part of a heavy interventionist: it stepped in to bailout banks and insurance companies left right and centre, fired Wagoner, signed away billions in monetary stimulus. And the usually vocal and heavy-handed socialist Europe has thus far tightened its purse-strings?

The question of unity

The EU and its peripheral nations are hit by the crisis in different ways. Some are forced to deal with their domestic property bubbles (Spain, UK), some (like Germany) face a collapse in their export economy, most have rushed to guarantee their banking systems (UK, France, Spain, Belgium, and pretty much everyone else), and others (Austria) must face their bad Eastern European/Balkans investments.

Long story short, these countries are too busy assessing its domestic impact from the global fallout, to agree on any unified strategy. It’s not hard to see that, short of a magic pill, no tidy monetary or fiscal policies can cure such a wide array of ailments. We should also remember that the ECB’s (European Central Bank) only central mandate is to maintain price stability (i.e. low inflation), where the Federal Reserve’s mandates are much more varied and powerful.

Automatic stabilizers

Europeans like to talk about their automatic stabilizers. It’s an insurance that cushions the economy against the kind of severe blows to the head that everyone’s taking now. The logic goes that in hard times with higher unemployment, the government will automatically open its coffer to provide the kind of social welfare that the American version of stimulus might do anyway.  Read more...