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.)
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