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US and Europe Separated by Deep Gulf on Policy

President Barack Obama and White House Chief of Staff Jack Lew.
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President Barack Obama and White House Chief of Staff Jack Lew.

The two-day effort by the United States Treasury secretary, Jacob J. Lew, to persuade Europe to consider shifting its focus from budget balance to growth highlighted a deep trans-Atlantic policy gulf that is likely to leave Europe as a drag on the global economy.

Mr. Lew pointed to evidence that increased government spending and looser monetary policy had helped the United States recover at a much faster pace than the Continent has.

But even as some European leaders expressed concern about rising unemployment and deepening recession, it was clear that Europe's political constraints — and Germany's insistence that bringing down deficits and reassuring lenders was the best route to sustained growth — were preventing a more expansionary approach from taking hold.

"Nobody in Europe sees this contradiction between fiscal consolidation and growth," said Wolfgang Schäuble, the German finance minister, sitting beside Mr. Lew at a joint news conference in Berlin on Tuesday. "We have the common position of a growth-friendly process of consolidation, or sustainable growth."

Consumed by the problems of the American economy and its efforts to hold off deep budget-cutting proposals from Republicans in the United States, the Obama administration has hardly been in a position in recent years to lecture other nations on good policy.

But Mr. Lew's trip to Brussels, Frankfurt, Berlin and Paris — his first swing through Europe since becoming Treasury secretary — gave the administration an opportunity to highlight the diverging economic fortunes of the United States and Europe and to make the case that more expansionary policies could actually help with budget deficits.

The United States has pointed out that its quick rescue of the financial system, front-loaded stimulus measures and delayed budget-cutting have helped foster 14 straight quarters of growth and a falling unemployment rate — even if the recovery has proved sluggish by historical standards.

In contrast, Europe has lurched from one crisis to another, hobbled by a complicated political structure and skittish financial markets. It continues to suffer through rising joblessness and economic stagnation. Greece, Spain and Portugal all remain mired in deep recessions, and even the large economies of Germany, Italy and France were contracting as well at the end of 2012.

A Treasury official, speaking on condition of anonymity to discuss the diplomatic conversations, said that while the Americans did not endeavor to lecture the Europeans, they did focus on the profound need for growth on the Continent, for the good of Europe as well as the world.

As Mr. Lew said in Berlin, "The driver for economic growth will be consumer demand and policies that would help to encourage consumer demand in countries that have the capacity would be helpful."

But some of the biggest levers that governments employ to bolster their economies during a downturn are seemingly out of the question in Europe, given its political constraints and some countries' heavy debt burdens. Any calls for more stimulus spending, less austerity or looser monetary policy face entrenched resistance in powerful Germany. The view there, shared in other Northern European countries like Austria and Finland, is that the European Central Bank has already gone far out on a limb with measures to prevent a collapse of the 17-nation euro zone.

Michael Heise, chief economist of the German insurance giant Allianz, said Tuesday that the central bank should already be thinking about how to reabsorb some of the money it has pumped into euro zone banks by issuing unlimited cheap loans. Otherwise, he said, easy money policies could feed new asset bubbles and remove pressure for economic reforms.

Looking on the bright side, the Treasury official said the European representatives all recognized the urgent need to focus on employment and growth. The official also said that there seemed to be growing pragmatism in Europe, with more officials willing to allow budget flexibility in certain economies, for instance.

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Nevertheless, in joint news conferences European officials appeared to shrug off the Americans' suggestions, as they generally have done for the last few years. In Brussels on Monday, the European Council president, Herman Van Rompuy, acknowledged the "vivid" debate over how to conduct fiscal policy, but reiterated the Continent's commitment to its present strategy.

"The European economies face a high level of debt, deep structural medium-term challenges and short-term economic headwinds that we need to confront." Mr. Van Rompuy said. "There is no room for complacency."

But cracks were growing in the European consensus. As France struggles with another slump, its leaders are urging a little less austerity as well. "Right now, all countries are consolidating, which means hitting the budgetary brakes, even in countries running surpluses," the French finance minister, Pierre Moscovici, said at a meeting with Mr. Schäuble in Strasbourg, France, last week. "If we all hit the brakes together, we all get stuck together."

At that meeting, Mr. Schäuble stood firm. "We need to stop this debate which says you have to choose between austerity and growth," he said.

In Paris on Tuesday, standing beside Mr. Lew for the briefest of news conferences, Mr. Moscovici said there was a convergence of views between France and the United States. He called for a "rebalancing" and the need to increase growth.

Their French meeting was overshadowed by a political scandal in Paris stemming from the revelation that a budget chief in Mr. Moscovici's ministry had secret bank accounts abroad. On Monday, Mr. Moscovici had canceled the bilateral meeting, though he later rescheduled it. On Tuesday, he said he had to cut the news conference short to meet with President François Hollande.

Some of the urgency of previous meetings involving Mr. Lew's predecessor, Timothy F. Geithner, has been bled out of the talks as American financial institutions steeled themselves against contagion from Europe and as the American economy gathered strength from a turnaround in the housing sector. Mr. Lew's first international trip was to Beijing rather than Berlin.

Still, officials on Mr. Lew's trip emphasized that Europe was the United States' largest trading partner and that the financial ties between the economies were deep. Europe's economic convulsions continue to hold back American growth.

In his meetings, Mr. Lew also discussed a cross-border banking union, the unfurling problems in Cyprus and a potential free-trade deal with the European Union, a prospect that Continental officials eagerly anticipate negotiating to help increase their exports.

Mr. Lew, a longtime budget specialist, is new to the world of international economic diplomacy. But he is getting a quick education. During his four-city, two-day tour, he met with the heads of the European Council and European Commission, his counterparts in the finance ministries of Germany and France, and Mario Draghi, the president of the European Central Bank. He will see many of the same officials in Washington later this month, during the spring meetings of the International Monetary Fund and World Bank.

Contact World Economy

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