Big, U.S.-style cash infusions wouldn't help many European countries, says ECB President Trichet—but they could weaken fiscal discipline and revive inflation
As the G-20 club of the world's wealthiest nations prepares to meet in London on Apr. 2, observers have focused increasingly on an alleged clash between the U.S. and Europe about how to deal with the global financial crisis. The U.S.'s putative solution is to spray the economy with liquidity, while Europeans are seen as more cautious, resisting gigantic stimulus plans beyond what they've already committed to.
That's leading to accusations that the Old World is dithering. Once chastised for their bloated public sectors, European leaders ironically now find themselves under attack for failing to run the euro printing presses fast enough.
But is it possible that European policy is appropriate for European conditions? Everyone agrees that global coordination is needed to combat a global financial crisis, but it doesn't necessarily follow that the same remedies apply in all regions. As European Central Bank President Jean-Claude Trichet points out in an interview with The Wall Street Journal published on Mar. 23, public-sector spending is already much higher in Europe than in the U.S.
Risk of Old Spending Habits
Indeed, massive public spending could revive fears of high taxes and inflation, hurting rather than helping confidence, Trichet said. "You have also to reassure your own people that you have an exit strategy, to reassure households that we are not putting in jeopardy the situation of the children, and to reassure businesses that what is done today is not done to the detriment of their own taxation in the years to come," Trichet said, according to a transcript of the interview on the ECB's Web site.
"Activation of the economy depends crucially on confidence," Trichet added. "And confidence today needs [sic] that we can prove to our own people that we have the right balance between the short-term and the medium- and long-term perspective."
It's important to remember how much effort European governments have expended in the past decade to get public spending under control, tame inflation, and create a stable basis for the common currency. Trichet didn't say so, but flouting euro zone limits on national debt might well be the signal for countries with a checkered history of fiscal responsibility, such as Italy or Greece, to return to old bad habits.
Trichet: "It Is Not a Race"
What's more, U.S.-style domestic stimulus would have only limited effect in export-oriented economies such as Germany, the Netherlands, Scandinavia, and many Eastern European countries. Their problem isn't so much falling internal consumption as that demand from Asia and the U.S. has collapsed. True, Europe, like the U.S., has a credit problem. But Trichet points out that the European economy is much more dependent on bank financing than the U.S., where capital markets play a bigger role. "That is why we have concentrated…on the commercial bank channel," Trichet said.
To be sure, Trichet fueled talk of a U.S.-Europe rift when he seemed to tell The Wall Street Journal that American policymakers should put their money where their mouths are. "What I would recommend for the U.S. is to, now, as efficiently and rapidly as possible, do what has been decided.… Let's do it! Quick implementation, quick disbursement is what is needed. Not embarking on useless and counterproductive quarrels which fortunately are over now."
But it wasn't clear whether Trichet was talking about the Obama Administration or the U.S. Congress—probably the latter. And he went on to rightly criticize a preoccupation among the press and pundits with comparing the relative size of stimulus plans. "It is not a race!" Trichet said. "We are all doing what we judge optimal taking into account the different characteristics of our economies…."