US urges euro states to boost demand

9/4/2013

By Robin Harding and Quentin Peel

Countries with sound finances should act to boost domestic demand, the new US Treasury secretary said on a visit to Germany that highlighted continuing sharp differences between the two countries on fiscal policy.

Jack Lew spent his first official trip to Europe telling eurozone leaders that nations with room for fiscal manoeuvre – such as his hosts in Berlin – must create demand to offset budget cutting in troubled economies from Spain to Greece.

“The driver for economic growth will be consumer demand,” said Mr Lew said in Berlin. “Policies that would help to encourage consumer demand in countries that have the capacity would be helpful.”

But there was little sign that Germany is ready to shift from its insistence on a tight domestic fiscal policy, even in a domestic election year.

“Nobody in Europe sees this contradiction between fiscal consolidation and growth. Our common position is for growth-friendly consolidation or sustainable growth, however you want to call it,” said Wolfgang Schäuble, German finance minister. “We haven’t been talking about differences that don’t exist. We have a different situation, economically.”

Germany plans to cut public spending by 1.7 per cent from 2013 to 2014 to get its structural deficit down to zero. From 2016, Germany plans to run a budget surplus.

The eurozone crisis has been a top economic concern for the Obama administration, which has seen spurts of growth in the US derailed by turmoil across the Atlantic.

“As we continue to address many of our long-term challenges, our economy’s strength remains sensitive to events beyond our shores,” said Mr Lew. “In particular, we have an immense stake in a strong and prosperous Europe.”

Seen from the US, the eurozone economy looks as if it is suffering from lack of demand, and the only in place it can come from is northern economies such as Germany. Without that, there is no path for the eurozone to grow, according to the US view.

“Targets for different countries in terms of ... potential GDP are not all the same, but I think it’s fair to say that zero is not a good target for anybody and negative is very bad,” said Mr Lew.

But from the European perspective it is not obvious that more consumer demand in Germany will feed through to countries such as Greece that lack a strong export sector. Germany also feels it is setting an example of disciplined fiscal policy.

Mr Schäuble said he had tried to explain to his US counterpart “the complicated structures in Europe. “We are on a good track in Europe, but we have difficult ...decision-making processes,” he said.

He declined to express an opinion about the need for swifter deficit reduction in the US budget deficit. “We trust the American government,” he said. “We don’t engage in public criticism.”

A senior US Treasury official said that the conversation focused on demand more broadly rather than just fiscal policy, and despite some differences in intellectual outlook, the countries were working together closely.

Both the US and Germany agree on the need for deficit reduction but have different views on its pace and the balance with promoting growth.

The German side pointed out its different institutional arrangements, including a constitutional debt brake, and the relatively rapid pace of wage growth, which should add to domestic demand. Mr Lew cited the relatively strong recovery in the US as evidence that it has the right policy mix.

Mr Lew finished his trip by meeting Pierre Moscovici, French finance minister, in Paris, where he found a warmer reception for his message of greater demand.

Mr Moscovici said that countries should “maintain a balanced approach between repairing public finances and doing whatever is necessary to ensure an economic pick-up in the eurozone”.

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