The US and the EU are going separate ways. And contrary to what it may seem, the room for political manoeuvre is smaller in the US than it is in the EU, despite the fact that the toolbox in the hands of the former is richer than the one in the hands of the latter.
Indeed, the US has a federal budget and a treasury, federal bonds and federal taxes and a more integrated market and political governance when the EU only has the monetary leg at the European level and other budgetary and economic legs at national level. However, politically the US finds itself in a narrowing corridor that is effectively handicapping the country’s chances of successfully tackling the crisis.
The Obama administration wants to reduce the deficit and trigger growth but with the Republicans blocking any tax-increase in Congress the only fiscal measure to reduce the deficit is cutting expenses. This is why, before the impossibility of using effective fiscal policy to fight deficit and reduce debt –cutting welfare will help figures look better but it will cost more in the mid/long-term- the only way to stimulate the economy is the old strategy of use-and-abuse of US monetary policy, i.e. printing money and making the rest of the world pay for it. The US Federal Reserve has kept the interest rate at low rates (0,25%) to inject liquidity in the economy and stimulate demand in the hope that this will trigger growth with which it can reduce unemployment and deficit. So far, the success has been rather moderate (1,3% growth) and the Obama administration knows very well that they can’t continue fueling the world economy for long. The Triffin dilemma according to which the country providing liquidity to the world cannot keep the value of the reserves is once again very relevant to understand the nature of the problem and predict further developments. The current US expansionary monetary policy is damaging the reserves in dollars of its creditors whilst continues to increase the US deficit. The fact that world reserves in euros are on the rise shows that despite the problems in the eurozone there is a growing tendency to move away from the dollar as a reserve currency. Moreover with the decline of the US economy the policy of having the American debt financed by the rest of the world will become increasingly untenable.
Arguably, the US economic policy is a result of the internal political circumstances. This doesn’t mean that Obama’s economic choice is the best one, it’s just the only one possible. The flaw of this false form keynesianism is that as long as poor and middle-classes lose social benefits and unemployment stays high the injection of money will not reactivate the domestic demand nor it is succeeding in increasing external demand either. Hence the US is turning to the EU to ask for help to stimulate demand, but Europe is against any expansive measures before deficit is under control. Indeed, Germany has been very vocal against expansionary monetary policy and the resignations of German representatives in the ECB reiterate this approach.
One must bear in mind that the effects of expansionary monetary policy in Europe are very different from those in the US. Since the 70s the rest of the world has been financing US deficit thanks to the fact that the Federal Reserve could afford to print money without generating inflation or bringing down the currency value. The EU cannot do that. If the EU follows an expansionary monetary policy the Euro will go down and inflation soar and it is not clear that the EU is in a situation of generating growth to compensate the increasing prices. Therefore, although it is understandable that Obama is putting pressure on the EU to gear up the European economy, it is equally understandable that the EU doesn’t want to go along the US lines.
How to marry the US and the EU monetary and economic policies? The only room for manoeuvre lies at European level. The creation of European federal state is the only way to raise global demand by generating supranational income (taxing speculative capital transactions, EU project bonds…) and placing better value-for-money investments.
The creation of the United States of Europe can be the solution that can match the needs of both the EU and the US in the short/mid term. However, as much as Europeans and the rest of the world can benefit from it, the truth is that it will not be able to solve the Triffin dilemma nor will it guarantee the adequate distribution of food, energy and materials among the peoples of the world.
The closer we get to the creation of some sort of United States of Europe the clearer it is that this alone will not suffice; if a better world is to emerge from the crisis a radical reform of world governance is needed. Indeed, the solution to the economic problem will need to be political; sooner or later the people of the world will need to sit down around the same table to agree how big is the cake we have to share – for sure smaller than what we thought it was some time ago- and decide how do we want to share it. World democracy is quickly moving from the stage of utopia to the stage of necessity.
Joan Marc Simon