ECB President Calls For Austerity Around The World

Austerity is not just the antidote for the financial trouble in Europe, says ECB head Jean-Claude Trichet.  It is time for the industrial nations all to cut spending sharply and raise taxes.

The ECB chief said in an FT editorial that “by the end of this year, government debt in the euro area will have grown by more than 20 percentage points over a period of only four years, from 2007-2011. The equivalent figures for the US and Japan are between 35 and 45 percentage points.”Trichet’s remedy: “Stimulate no more – it is now time for all to tighten.”

Trichet admits that the balance between simulation and austerity is a difficult one because there is no way to predict whether the move from government aid to the economy to higher taxes and a sharp cut in government spending   is at the perfect tipping point. That leaves policymakers to guess at the proper timing, which is impossible given the complexity of modern economies.

So which is the lesser of two evils? Austerity probably because it is expedient and leaves debts for future generations to pay. But that is too simple of an analysis. The world is headed back into a period of sluggish economic growth which could even cause another recession. Chinese and US officials have warned that the problems in Europe are not isolated. Exports from the two huge economies to the EU could drop sharply. Bank exposure to sovereign debt of weak economies such as Greece could cause huge bank losses  at large banks in the US, UK, France and Germany.

Stimulus is as unpopular in the US as austerity and higher taxes would likely be. Most polls show that Americans are worried about the deficit and its effects on the financial future of America.   Meanwhile, the jobs and real estate troubles are not improving and may be getting worse while access to credit for small businesses, an important aspect of the economy, barely exists.

Americans have not stared austerity and new taxes in the face. Most European citizens have found the experience unsettling. The prospect of cuts in public services,  even Medicare and Social Security, seem unimaginable as do increased taxes. It will take those actions, at least, to close the deficit and begin to eventually lower the national debt.

The practical reasons for continuing the stimulus  are counterintuitive. The first set of stimulus programs did not work, so it is time for a second. A second one would be a gamble, but it is probably worth taking when the alternative could be another collapse of the economy.

Douglas A. McIntyre