Bini Smaghi argues that the US and Europe have different attitudes towards future growth – Europe more cautious, US with more optimism. However, the challenges they face require a coordinated approach and market reforms to restore competitiveness.
Lorenzo Bini Smaghi, Member of the ECB's Executive Board, highlighted that the following risk factors are shared by the EU and the US and therefore should be tackled coordinated by both countries:
§ uncertainty about self-sustainability of growth without relying mainly on the policies aimed at stimulating demand which have been put in place by most industrial countries in response to the crisis;
§ turbulence in financial markets, which has shifted to sovereign risk;
§ unemployment, which remains high, although past its peak;
§ the situation on the capital markets, particularly the soundness of banking systems in the aftermath of the economic and financial crisis, and their ability to provide adequate credit to the economy.
He argues that across the Atlantic there is a more optimistic view of the ability of the US economy to get back onto a growth path like the one before the crisis. The large difference built up in these two years mainly concerning potential revenue would justify the continuation of policies to stimulate demand in the near future. The envisaged return to sustained growth rates would allow the deficit and debt to be quickly reabsorbed. In Europe, attitudes are more cautious. The pre-crisis situation was probably unsustainable everywhere, partly due to the over-indebtedness of the private sector. Trying to return to those levels of activity may bring about financial conditions that could reinflate the bubble or turn it into a public debt bubble.
The diversity of views may partly reflect differences in the underlying positions of the economies. There is no doubt that the potential for US growth is higher than Europe’s, if only because of the stronger demographics and greater market flexibility. Several European countries, where growth was stronger before the crisis, have shown a loss of competitiveness and will have to reform their markets profoundly in order to grow again.
With regards to the G20 interaction, Smaghi said that Europe and the United States would both benefit from a better functioning world economy, but they depend on decisions taken by other G20 countries. The rigidity of the Chinese monetary regime is slowing down the adjustment of relative competitiveness and the recovery of the developed countries. In this area, Europe and the US have common interests, and are more likely to succeed if they pursue them in a joint and coordinated strategy. The experience of recent years shows that separate action is unlikely to succeed.
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