Europe's Leaders Must Say "Stimulus"

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Dean Baker
TPMCafé, April 2, 2009


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When it comes to regulating the financial sector, Europe's leadership is on the right track. We clearly need to rein in the masters of the universe so that they don't have the opportunity to do even more damage. It would be great if Sarkozy could convince Obama of the need to rein in hedge funds, private equity funds, and the other non-bank institutions that still play by Wild West rules in the United States. It would be even better if everyone agreed on a modest financial transactions tax (like the 0.25 percent stock transfer tax in the U.K.) so that we can all profit from the speculation that does take place. Such a tax could produce more than $100 billion in annual revenue in the United States.

However, when it comes to stimulus, the Europeans seem to be missing the boat. Their economies will be mired in slow growth unless their governments are prepared to spend more money. This is just simple arithmetic.

Unlike the United States, France and Germany have very high household saving rates. While the U.S. saving rate was negative until the housing bubble burst, saving rates in both countries are well into the double digits.

If households don't spend, then the demand must come from elsewhere. While both countries have somewhat higher rates of private investment than the United States, this does not come close to making up the gap in household saving rates. The major difference is that these countries have enjoyed near balanced trade or more often trade surpluses, in contrast the large trade deficits in the United States.

However, these two situations are related. The trade deficit of the United States and other bubble countries was the surplus of France and Germany. Now that the bubble has burst, the United States and the other bubble countries no longer have the wealth to support their high levels of consumption. This means that France and Germany will not be lifted out of this downturn by export demand.

If France and Germany want to get on the path to recovery any time soon, they have no choice but to do it via increased domestic demand. It will help the whole world if France and Germany, along with the rest of the Europe, do their part to boost demand with large stimulus packages. However, first and foremost, it will help the economies of Europe and reduce their unemployment rates.

It would also be helpful if someone told the European Central Bank (ECB) about the recession. If the ECB knew about the crisis, it might lower its interest rate close to zero, thereby providing some additional boost to the European and world economy.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.