European stock markets have rallied in anticipation of an informal summit of European Union leaders Wednesday in Brussels. A major policy pivot is expected to address the euro zone’s debts and deficits crisis.
Up to now, European leaders have emphasized austerity, and that has cost some of them their jobs. The new approach is likely to focus on the same kind of growth President Obama has pursued in the United States — where Democrats and Republicans are drawing opposite conclusions from the euro crisis.
If you listen to House Speaker John Boehner (R-Ohio), the grand lesson to be drawn from the crisis in Europe is this: Very bad things can happen when a nation’s debt gets too high.
“People aren’t clamoring to invest in Greece today,” he said on ABC over the weekend. “And if we don’t begin to deal with our debt and our deficit in an honest and serious way, we’re not going to have many options.”
Rep. Cliff Stearns, a Florida Republican who’s a member of the House Tea Party Caucus, considers Europe a clear warning for the U.S.: “I think the lesson to be learned is that we need to reduce spending here, or we’ll run into the same situation.”
But Democrats in Congress have a very different takeaway from Europe’s woes — namely, that austerity has only made matters worse.
“It’s not an accident that the American economy is outperforming all the European economies, including England, where they put in severe austerity,” said Rep. Barney Frank (D-Mass.), ranking member of the House Financial Services Committee, “because we have resisted that severe austerity and have done more spending.”
A ‘Balanced’ Approach
Obama, after meeting with Europe’s leaders this week, called for a “balanced” approach to the euro crisis that very much resembles his own: a commitment to long-term fiscal discipline while pursuing growth in the short term.
“The good news was you saw a consensus across the board from newly elected [French] President [Francois] Hollande to [German] Chancellor [Angela] Merkel to other members of the European community that that balanced approach is what’s needed right now,” he said.
Even some who have questioned many of the president’s other economic policies agree with him on this one.
“You can’t control costs without growth. You can’t — particularly in this country, [you're] never going to be able to put 5 more million people … back to work without growth,” U.S. Chamber of Commerce president Tom Donohue said at a breakfast panel earlier this week.
Christina Romer, the University of California, Berkeley economics professor who once chaired Obama’s Council of Economic Advisers, said she thinks “people are realizing that what’s going on in Europe now isn’t working.”
Romer said Europe’s economic medicine has been killing the sick patients.
“Asking them to immediately cut their budget deficit is surely bad policy. It is making their unemployment rate higher. It’s making it harder for them to get their deficit under control,” she said.
And that lesson, said Harvard economist Kenneth Rogoff, should not be lost on the U.S.
“I mean, clearly if you tighten the budget now, in the middle of this recession or even if we weren’t, it’s probably going to have a short-term negative effect on growth,” he said.
In the end, according to C. Fred Bergsten, who directs the Peterson Institute for International Economics, what really distinguishes Europe from the U.S. is a question of urgency.
“If the markets are voting against you, if you can’t borrow at sustainable interest rates, then you have no choice but to put your house in order,” he said. “That’s Greece and some of the other Europeans. If you’re still getting money very cheaply, if you can finance your budget deficits easily, like the United States, you’ve got more time.”
Which may also be why Congress has been putting off a lot of hard decisions.