Perhaps Geithner Will Learn Some New Tricks

Treasury Secretary Geithner is in Berlin. He’s there hoping to convince Europe to continue runaway deficit spending he believes will somehow rescue the world economy.

The Continent has its own view. Europe is still executing the $1 trillion rescue package in support of its most indebted countries, and it’s trying to dial down any new spending.

According to Der Spiegel:

“Christina Romer, who heads up the White House Council of Economic Advisers and who was with Geithner in London on Wednesday, said that European countries should be wary of cutting spending too quickly. ‘There is a certain amount of rush for the exits on fiscal policy,’ she told reporters. The US is hoping that stimulus-fueled growth will ultimately result in higher tax revenues which can then be used to pay down debt.

“Paul Volcker, former chairman of the US Federal Reserve and an economic adviser to US President Barack Obama, also argued recently that Europe should focus on encouraging growth rather than cutting spending. Referring specifically to France and Germany, he said in an interview with Bloomberg radio earlier this month that ‘it would help a lot if the rest of Europe, the strong part of Europe … if they have more growth, that will help these countries on the periphery.’

“Germany, however, is taking the opposite approach. Rather than take on even more debt to ramp up the economy, Chancellor Angela Merkel wants to set an example for Europe on how to cut spending and reduce budget deficits. Her government is currently looking into ways to make significant spending cuts. Many economists in Europe even view deficit and debt reduction as a key precursor to economic growth.

“‘Crises often present opportunities, and it looks like Europeans are eager to take advantage,’ says Michael Hüther, head of the Cologne Institute for Economic Research. ‘Many studies show that (budget cuts) prepare the way for above average growth.'”

It’s a little unexpected to see “Tall Paul” Volcker also going along with the idea of Europe spending its way out of the euro crisis. At least the Europeans are now trying to have a more conservative spending policy. With similar debt and deficit problems in the US and Europe, maybe there’s a chance a bit spending restraint will rub off on the US team… doesn’t sound that likely. You can visit Der Spiegel to read more about why the US and EU are oceans apart on fiscal policy.


Rocky Vega,
The Daily Reckoning

The Daily Reckoning