Europe has again defeated the US in the Ryder Cup. Where golf is concerned, there is nothing we need to learn from the US. But in the handling of the economic crisis, there is much that Europe needs to learn from the US, and fast.
Six years after the financial crisis of 2008 that nearly brought about the total collapse of the international financial system, as credit froze and banks were losing the trust of their depositors, the US is now flying high again. This week we had figures showing that its economy has continued to add employment at a fast pace, bringing the unemployment rate below six per cent for the first time since the crisis.
On the international exchange index, the US dollar is soaring as America becomes the world's leading producer of energy and is in a position to start exporting it - pushing down energy prices in the process. The only blot on the US economic performance is that economic growth is not well distributed, with the top echelons of society grabbing most of the fruits of economic revival while workers' wages remain stuck at pre-crisis levels. But this is a process that will sort itself out if economic growth proceeds unabated, as a shortage of labour will eventually - and inevitably - translate in higher wages, without pushing up inflation, given the productivity gains accompanying economic growth and falling commodity and energy prices.
Europe, especially the eurozone, is a complete antithesis of the US success. Unemployment remains stubbornly high and a generation of youth is being lost as they cannot participate at all - or at least not to the best of their abilities - in an economy stuck in a crisis. Countries that were hardest hit by the crisis due to their deficit and debt level at the point of crisis entry have undergone several rounds of crushing austerity measures but they do not have much to show for it. They are stuck in an economy that has all the characteristics of deflation, with falling prices, high unemployment, a lack of investment, gummed bank credit and their burden of debt getting heavier as they are caught in a deflationary debt trap.
From Malta this view seems unreal as, thank God, our economy has continued to perform and, indeed, accelerate more in the US style rather than the European. But we are the exception to the European rule and let us not kid ourselves: if the European crisis continues, our economic performance will also be affected, as demand for our exported goods and services is mainly from the EU.
The obvious question is what has caused this difference in results between the US and the EU, particularly the eurozone. The problem was largely the same, so why - in a such an economically inter-connected world - are the young people of Pennsylvania finding work, even if it is not well paid, and those in Portugal have no jobs?
Clearly this has been due to the difference in response to the crisis from the US and from Europe.
The US, as a single federal state with a federal Congress, an elected federal executive and a single treasury and central bank, could respond more forcefully and punctually to the crisis. Although not to the degree desired by Keynesian economists such as Paul Krugman, Larry Summers and Joseph Stiglitz, fiscal policy was complementary to the aggressive monetary policy that brought interest rates down to zero. When that was not enough, the Federal Reserve made three rounds of quantitative easing - buying long-term government bonds and mortgage-backed securities to bring down long-term interest rates, which gave banks space to entertain fresh credit demands and, in the process, stabilising and reviving the housing market. More than anything else, the US immediately addressed the capital deficiency problems of its banks, resulting from losses they suffered in the crisis, using fiscal policy to re-capitalise them so that they could immediately become active players in the revival of economy.
The US recipe which is proving so successful was based on three pillars:
1. The immediate re-capitalisation of banks through Troubled Asset Relief Program (TARP) funds approved during the last days of the Bush administration.
2. The fiscal stimulus given by the Obama administration soon after executive takeover.
3. The Ultra-loose monetary policy consistently operated by the Federal Reserve.
The European response was piecemeal, uncoordinated and altogether insufficient. There was, and still is, no adequate reply to the capital deficiency of European banks. Bank stress tests undertaken in various rounds were too soft and failed to serve any purpose. Even the current process of Asset Quality Review, to be followed by aggressive stress tests, is half-baked: without a ready fund that can be used to fill up any capital deficiency holes, it is like risking starting a fire without having an extinguisher at the ready. As in the US, Europe needed to use fiscal policy to create a TARP-like capitalisation fund, and the burden for it should have been pan-European. It was no use expecting countries struggling with excessive fiscal deficits within a currency bloc they do not control to use more fiscal funding to fund their banks' capital deficiency.
Instead of fiscal stimulus, Europe imposed harsh austerity programmes. The word 'austerity' was not in the US lexicon for handling the crisis. Austerity crushes demand, leading to economic contraction, larger deficits and yet more austerity. It is a spiral which, like a slippery slope, is hard to break out of. Europe needed a restructuring of the disequilibria in countries like Ireland, Portugal and Greece, but this had to be compensated for by the creation of compensating demand in surplus countries. Instead, surplus countries such as Germany also adopted austerity measures and balanced budgets when their excessive balance of payments' surplus needed the totally opposite approach.
And lastly, the only institution in the EU that has the autonomous authority to work in a federal-type manner, the European Central Bank (ECB), was not sufficiently forceful when it came to loosening monetary conditions. One could mention the interest rate increases in 2011, which were a heresy in the context in which they were applied and had to be reversed immediately. When the zero-interest boundary was reached, the ECB could not move into quantitative easing as quickly as the US Fed, and only now that inflation in the eurozone overall has fallen to 0.3 per cent (meaning that problem countries are effectively in deflation), is the ECB finding the courage to do some altogether inadequate quantitative easing. In the process, it is attracting harsh criticism from German quarters, which only respect the independence of the ECB when it suits them.
The stasis of the EU organisational structure is becoming a serious threat to its own existence. Democracy cannot introduce endless rounds of austerity without at least a credible light at the end of the long and dark economic tunnel. Inevitably, such dissatisfaction will become an easy hunting ground for extremist demagogues of the left or the right who promise easy solutions that will challenge the structure and stability of the entire EU. Papendreou and Berlusconi were practically forced out of power by Berlin but they were losing support in their home ground in any case. What would happen if Marie le Pen becomes the next democratically-elected President of France with a popular mandate to break all the EU and euro rules?
If the EU and the euro are to be saved, there is not much time left to revise our response to the crisis and build on the model of the US that proved so effective. Obviously, institutional arrangements are different, and a direct copy is impossible. But the general message is that the ECB - as the only pan-European institution with autonomous power that gives it the flexibility to move fast and effectively - has to deliver, through its monetary policy and macro-prudential mandates, solutions that carry the load that fiscal policy cannot shoulder within the current EU institutional framework. It can be done if countries respect the independence of the ECB all the time and not just when it suits them.
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