The severe fiscal, financial and economic difficulties in Europe underscore the need for Washington to develop credible plans for comprehensive, long-term fiscal reforms -- in part because spillover problems from Europe could well aggravate U.S. budget challenges.
But Europe’s experience also cautions against excessive austerity measures that can turn a weak recovery into another recession. “These are critical times,” says Senate Budget Committee Chairman Kent Conrad, “and we’ve got to be smart about how we get back on track.”
These were among the key themes that emerged Thursday at a forum in Washington that focused on Europe’s perilous situation and its possible implications for the American economy and U.S. fiscal policy. The program was sponsored by the Committee for Economic Development (CED) and The Concord Coalition.
In addition to Conrad’s keynote speech, the forum featured Stephanie Riso, the head of the European Union's fiscal policy unit, and a panel of four American economists: Douglas Elliott, a fellow with the Brookings Institution; Simon Johnson, an MIT professor; Joseph Minarik, senior vice president and director of research with CED, and Diane Lim Rogers, Concord’s chief economist. Ed Andrews, a former New York Times economics correspondent, served as moderator.
On Thursday Concord also released a paper by Andrews, Minarik and Rogers entitled “Not Just Their Problem: Europe’s Debt Crisis and U.S. Fiscal Policy.”
Citing more grim news this week in Europe, Conrad warned that if the situation there continued to worsen, U.S. growth this year could “evaporate in a world-wide recession.” He and other speakers emphasized that exports to Europe -- and to other countries that do business in Europe -- account for a significantly larger share of U.S. economic growth than in the past.
Other concerns are weighing on investors in the United States and around the world. Conrad pointed to continuing problems in the U.S. housing market, job cuts at all levels of government in this country, instability in the Mideast, and political deadlock in Washington as officials face an array of key decisions this year on tax and spending policies.
Conrad suggested that short-term steps to bolster the economy should include badly needed improvements in infrastructure. But he said such measures, though needed, could make long-term challenges even more difficult. He said more public understanding and support is needed for structural reforms in entitlement programs and tax policy.
Introducing the panel discussion, Andrews observed that many American assumptions about Europe were mistaken. Many in this country, for example, fail to appreciate the current importance of the European economy to our own.
In their presentations, both Rogers and Minarik emphasized that the global downturn in recent years had been synchronized. They said national economies are more closely linked by trade and financial ties than in the past, with Rogers adding that in many ways “we are in much the same boat.”
Relative to many other countries, however, the United States faces a “very large” gap to stabilize its debt, Rogers said. But she pointed out that this country also has a greater economic capacity to close that gap – and continues to enjoy unusually low interest rates.
Among Minarik’s key concerns: If those rates rise, federal debt costs could soar -- perhaps leading to still higher rates and more government borrowing that would eventually produce a “fiscal and financial explosion.”
Responsible U.S. fiscal reforms, he said, could help keep interest rates here low, support worthwhile investment and boost confidence in the global economy. “It would be good for Europe and it would be good for us,” he said.
Elliott stressed that Europe was facing not a single crisis but a variety of them that involved fiscal policies, banking, national and international institutions, competitiveness and market confidence in sovereign debt.
He predicted that the euro area “will have to get worse before it gets better.” Eventually, he said, there would need to be a “grand bargain” that would involve concessions by the stronger as well as the weaker countries. He estimated the chances of that at 3-in-4.
Johnson emphasized the role that irresponsible banking decisions had played in Europe’s difficulties, with possible repercussions for U.S. banks as well. He said large, highly leveraged banks were “a huge fiscal risk” for governments that is often overlooked.
Johnson also suggested that Washington not extend any of the Bush-era tax cuts set to expire at the end of this year. Instead, he said, Congress could cut payroll taxes for another year or two -- a policy that would ensure benefits for low-income Americans who pay little or no regular income taxes.
Sounding an upbeat note, Riso acknowledged that Europe is facing multiple crises but insisted that officials there are focusing on constructive changes, job growth and solid long-term planning.
But she added: “It is going to be hectic. It is going to be difficult.”
The same can safely be said of U.S. efforts this year to deal with our own short-term economic problems and long-term fiscal challenges. But elected officials should push forward on them all the same.