<< A fragile relationship.@ Spero News
Since the start of the global financial crisis in 2007, the United States has largely been viewed, rather negatively, as a promoter of unfettered capitalism. This perception has caused strife in the transatlantic relationship as some have argued that America’s lead on financial deregulation has put further strains on the economic systems of European member states – where social programs are a prominent feature of the collective landscape.
According to one report, Spain has experienced its worst contraction in 40 years and Germany, Europe’s economic powerhouse, anticipates a €316 billion tax deficit over the next four years.[1] While some commentators view the social cushioning provided by government programs as the means to decrease demand for a sustained stimulus, if the crisis continues and unemployment balloons, larger European deficits will stunt growth and make the Euro region appear less attractive for outside investors.
However, what may be worse and perhaps a blow to the US-European partnership was the original $787 billion dollar stimulus plan which included “Buy American” provisions. Instead of letting the market determine the efficient allocation of resources, the US signed legislation that permits the spending of stimulus funds largely on domestic firms for “shovel ready” projects. Such projects include restoring infrastructure like building bridges as well as digitizing private healthcare records.
Although the US, along with the expanded G20, made commitments against erecting barriers to trade, these “beggar thy neighbor” policies bring serious questions about US commitments to free trade. During July 2009, elements within the US Congress actively reaffirmed this unilateral approach by suggesting border tariffs on countries that do not curb their carbon emissions within acceptable measures.[2] While such measures certainly push concerns found within US national interests, their overall implementation stems from the current financial situation.
While barriers to trade may substantively affect developing countries more than those of Europe in terms of the aggregate impact, these policies should not be underestimated in their signal to the global economic system, and above all Europe. With consumer spending in the US dropping down as low as 60% and unemployment rates rising, the US’ ability to hit 10,000 on the DOW index reflects both the impact of government intervention as well as US’ shrinking role as a global consumer. More importantly, increased expenditures as well further barriers to trade by the US help to further undercut the legitimacy of austerity measures and the like purported by the dominant economic doctrine, ever so stylized as the Washington Consensus.
Although the demise of US power and its reach has been heralded before, it may still be important to deepen relations with European allies keeping the proper balance in order to counter competing powers. Domestically, the US will have to revamp its economy and turn the focus away from driving growth through the debt markets which should further decrease the associated risks in implementing monetary policy with large amounts of public debt. In doing so, the US will have to decrease its export deficit by promoting a balanced mix of manufacturing and services within the economy.
The implications of this approach and current status of transatlantic relations and the will be discussed in part 2.
[1]Marcus Walker, Europe’s Social Benefits are at Risk, Wall Street Journal, May 15, 2009, http://online.wsj.com/article/SB124230001923619099.html
[2]Peter Cohn, Buy American Provision Triggers Rebuke, July 22, 2009, Government Executive, http://www.govexec.com/dailyfed/0709/072209cdam1.htm
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