Bowyer: Why Europe Recovers Before the US

“I will not let anyone tell me that we must spend more money."

- German Chancellor Angela Merkel, March 29th, 2009

America works even when it's tried in Western Europe, and the old world fails even when it's tried in North America.

This past spring, United Kingdom Prime Minister Gordon Brown and United States President Barack Obama attempted to launch a "global new deal." They attempted to persuade other developed countries, especially in the European Union, to embark on a coordinated program of very high stimulus spending. Angela Merkel led the opposition, issuing a resounding 'nein'. French President Nicholas Sarkozy added his 'non' to the chorus shortly thereafter. The rest is history. The Obama administration enacted a stupendously large spending program; the United Kingdom followed suit. The European Union resisted the clarion call of international Keynesianism and left the recovery largely to the private sector. And then, something fascinating happened: They recovered, and we did not. Some of these numbers are a little close to the line and clearly other factors were involved too: The US has had the largest stimulus so far, Britain after that, Germany slightly less than Britain and France much less.

So far,the GDP data shown below indicates that the second quarter (that is, roughly the spring season) growth numbers showed expansion in the two countries that most conspicuously failed to used Keynesian tools. The data also shows that the two countries which most stubbornly hewed to the Keynesian line continued to contract.

Famed French economist Guy Sorman recently told me, "We invented the word 'entrepreneur', exported it to you, and then forgot it. Now, you are sending it back to us." He's right. At precisely the moment when the United States is shifting toward discarded European solutions such as nationalization, inflation, and fiscal manipulation, a number of European countries are liberalizing their markets. Angela Merkel has been described by many observers as the German version of Margaret Thatcher. The entrepreneurial Sarkozy ran on a platform of creating a France that "wakes up early."

Not all of this is a matter of electoral shift. The European Union has some structural factors which have helped it resist bad policies. For example, the Union itself imposes certain spending and debt limits on member countries. These limits emboldened European politicians who resisted Anglo-American policy bullying. Furthermore, the European experience with hyperinflation earlier in the twentieth century persuaded them to focus their central bank exclusively on matters of price stability. The United States, on the other hand, has given our own central bank a "dual mandate" for inflation control to be balanced by low unemployment. In other words, the fiscal phrenology of the Philips curve was hard-wired into the very structure of the Fed.

It's not over yet; there are promising signs that perhaps last year's electoral swing to the left was a summer/fall fling rather than a serious relationship. Time will tell. But for now, we see played out across the Atlantic a dictum uttered by Someone who was neither a European nor an American: The last shall be first, and the first shall be last.