In Recovery Race, US Looks to Outstrip Europe
There was more evidence Thursday that the United States economy might be stabilizing, if not rebounding, even as economic reports in Europe remained gloomy.
The American news — showing slight growth in retail sales and a dip in first-time jobless claims, as well as rising stocks — was not enough to end the disagreement between bulls and bears over how soon the economy would improve.
But the apparent divergence of fortunes between America and Europe highlighted the different approaches to solving the financial crisis, and why some economists say the more aggressive American strategy may be working better, at least for now.
It is a debate that is likely to be one of the issues dominating discussions when finance ministers from the eight largest economies meet in Italy this weekend.
Some private economists are even predicting that the American economy will resume growth in the fourth quarter, while Europe’s economy is expected to remain in recession well into 2010, after contracting an estimated 4.2 percent this year compared with an expected 2.8 percent decline in the United States.
“The shock originated in the U.S., but Europe is paying a higher price,” said Jean Pisani-Ferry, a former top financial adviser to the French government who is now director of Bruegel, a research center in Brussels.
Almost from the beginning of the crisis, the United States and Europe chose largely different paths to aiding their economies. The most stark was Washington’s willingness to commit hundreds of billions of dollars to stimulus spending — in addition to moving aggressively to shore up banks and keep credit flowing — versus Europe’s worry that similar spending would increase inflation in the future.
Just as the policies pursued during the Great Depression have been dissected ever since by economists, the fate of the United States and Europe as the two regions emerge from the global crisis will be analyzed for decades to come.
The lessons will not only guide policy makers in future crises, but also could redefine the debate over how much state intervention in the economy is appropriate.
“History is one big laboratory experiment that only gets run once,” said Niall Ferguson, an economic historian at Harvard who has been one of the loudest critics of the White House’s spending initiatives.
The argument behind the American approach — staggering stimulus spending — is that the economy must be prevented from falling into a self-perpetuating downward spiral, and that increasing the deficit to do that is prudent.
One crucial concern about America’s increased deficit spending — that it would lead investors to demand higher interest rates on United States debt, making it far more expensive to borrow and slowing the economy — has been allayed, for now. An auction on Thursday of $11 billion in 30-year Treasury bonds found enthusiastic buyers, helping to push the Standard & Poor’s 500-stock index to a seven-month high.
But it is impossible to know how much the apparent, if nascent, stabilization of the American economy comes from the stimulus spending and how much from moves like propping up the banking and credit systems, especially because much of the stimulus money has yet to make it to the economy.
“I think America is further ahead in terms of fixing problems with the banks,” said Mr. Pisani-Ferry, “and countries like Germany have been hurt tremendously by the decline in world trade.”
Figures released this week showed that German exports plunged 28.7 percent in April from a year earlier, the steepest drop since the government began keeping records in 1950.
Still, some experts say that Europe’s approach could pay off over the longer run.
There remains a significant risk that deficit spending in the United States could lead to inflation in the long run. Concern over the deficit has already led to a sharp rise in interest rates in the last month. A continued rise could threaten any American recovery.
And while its growth is expected to be muted for years, Europe will not be burdened by as much debt as the United States, having avoided big stimulus spending.
Moreover, many American financial institutions remain larded with bad loans. And some of the banks the government recently allowed to leave the Troubled Asset Relief Program could need additional government help if the economy worsened instead of rebounding.
Underscoring the risk that hopes for a quick turnaround anywhere may be premature, the World Bank said Thursday that it expected the global economy to shrink by nearly 3 percent in 2009, far deeper than the 1.7 percent contraction it predicted just over two months ago.
And both Europe and the United States face the specter of rapidly rising unemployment, even if a rebound is beginning.
The Organization for Economic Cooperation and Development estimates that from 2007 to 2010, developed economies will have shed some 25 million jobs. The unemployment rate in both the euro zone and the United States is expected to rise above 10 percent next year.
“That pace of increase has never been experienced in the postwar period,” said Jonathan Coppel, a senior economist at the Organization for Economic Cooperation and Development. “This is going to create a headwind.”
When the Treasury secretary, Timothy F. Geithner, first met with other finance ministers representing the 20 largest economies in March, he urged his European counterparts to increase stimulus spending. But in Italy, Mr. Geithner will press them to replicate the stress tests applied to American banks.
During a conference call with reporters Thursday, Robert B. Zoellick, the president of the World Bank, reiterated the need for such tests.
“A stimulus without getting the credit markets working again is like a sugar high,” Mr. Zoellick said. “I would put a higher focus on getting credit markets working again, getting banks recapitalized and cleaning up bad debts.”