Sunday, April 29, 2012


Spending Stimulus Urged for Euro Economies Not in Crisis

U.S. Treasury Under Secretary Lael Brainard urges European countries to use short-term stimulus to end Europe's economic crisis, even if this means short-term deficits.

In April 25 remarks to the Boston Economic Club in Boston, Brainard said the European Union should pursue such short-term fiscal stimulus in the aggregate even while its weakest economies are slashing public spending. Without identifying any countries by name, she pressed governments in those countries not facing fiscal crisis to spend more money in the short term.

"Only a small group of member states retains the scope to implement countercyclical fiscal policy with the heightened market scrutiny and borrowing costs brought on by the crisis," Brainard said.

She lamented the absence of a Europe-wide fiscal policy mechanism, especially at a time when, in aggregate, the euro area is slashing spending despite having the smallest aggregate fiscal deficit and the lowest prospects for economic expansion among the world's advanced economies.

Similarly, she said, Europe's country-by-country approach is complicating its struggle to restore confidence in European banks. While fiscally strapped governments have been leaning on the big banks in their countries to buy up public debt, some of those governments might have to pay for recapitalization of those same banks.

Although slow to come, Europe's steps to subject banks to stress tests and set higher targets for deposit reserves have helped restore confidence somewhat, Brainard said. But perceptions about the close links between government and bank balance sheets while some of those banks are reducing loans in order to meet higher capital standards is shaking up financial markets, she indicated.

"The negative feedback loop between sovereign and bank balance sheets ... could be attenuated with Europe-wide efforts at bank restructuring and recapitalization," Brainard said.

Worldwide economic demand remains subdued relative to levels before the economic crisis as countries with trade surpluses have not offset reduced consumption in countries with trade deficits. The under secretary said China must rebalance its economic expansion to rely more on domestic consumption and less on export industries.

Setting its currency exchange rate free will help China sustain that process of adjustment, Brainard said. "A market-determined exchange rate will be a powerful tool as China rebalances."

(This is a product of the Bureau of International Information Programs, U.S. Department of State.) 

No comments: