At G-20, U.S. And Germany May Argue Offer Fiscal Policy Stances

Posted Jun 21st 2010 4:40PM by Joseph Lazzaro
Filed under: Financial Crisis

At the G-20 summit in Toronto later this week, a battle may surface between the "immovable object" and the "irresistible force." Germany and the United States are at odds concerning the world's proper public policy stance at this stage of the financial crisis.

Germany is emphasizing that credit market and economic conditions are healthy enough to move forward with deficit reduction and related stimulus exit strategies, Bloomberg News reported Monday.

Conversely, the United States says widespread budget deficit reduction is premature -- the U.S. would like to see certain countries increase demand by increasing spending.

Fiscal/Economic Analysis: The U.S./European economic recoveries are still too fragile, but Europe is having none of it. European nations, led by Germany, appear determined to return fiscal budgets to a more-balanced state. Further, institutional investor pressure probably has played a role in the austerity stance, with nations seeking to avoid becoming the next target of the bond vigilantes, ala Greece.

The danger in implementing austerity measures too soon? It could repeat the 'mistake of 1937,' when policymakers did just that and hurt an ongoing economic recovery. Demand in the U.S./Europe is not strong enough yet to enable the recovery to advance to self-sustaining expansion status, hence any premature belt-tightening by the major powers would be a mistake, from a macroeconomic standpoint.

Tags: bond vigilantes, debt crisis, Europe, fiscal stimulus, G-20, Germany, inthenews