Thursday, July 28, 2011

Who Is In Worse Shape – the United States or Europe?


Amplify’d from baselinescenario.com
Who Is In Worse Shape – the United States or Europe?
If economic performance is in part a beauty pageant, as John Maynard Keynes suggested, both the U.S. and Europe seem to be competing hard this summer for last place.  If anything, based on the latest flow of news coverage, Europe might seem to be experiencing something of a resurgence – last week the eurozone agreed on a big deal involving mutual support and limiting the fallout from Greece’s debt problems.  In contrast, the U.S. this week seems to be completely mired in a political stalemate that becomes more complex and confused at every turn.

But rhetoric masks the reality on both sides of the Atlantic.  The eurozone still faces an immediate crisis – the can was kicked down the road last week, but not far.  The United States, on the other hand, is in much better shape over the next decade than you might think listening to politicians of any stripe.  The American problems loom in the decades that follow 2021 – the good news is that there is still plenty of time to sort these out; the bad news is that almost no one is currently talking about the real issues.
In a policy paper released by the Peterson Institute for International Economics last Thursday, Peter Boone and I went through the details on the eurozone crisis, including how this common currency area got itself into such deep trouble – and what exactly are the likely scenarios now (you can also see the discussion and contrasting views at the launch here).
In our assessment, the issue is lack of effective governance within the eurozone.  Governments had an incentive to run reckless policy – either in terms of budget deficits (Greece), out-of-control banks (Ireland), or refusing to create an economic structure that would support growth (Portugal).  These policies were financed by loans from other countries, particularly within the eurozone, because there was a widely shared perception that if any country were to get into trouble, it would be bailed out by deep-pocketed neighbors (Germany).
Read more at baselinescenario.com