NEW DELHI – The decisions taken at the December 9 EU summit may or may not have calmed the escalating eurocrisis. Time and financial markets will be the ultimate arbiters of what was decided in Brussels. But the transatlantic misunderstandings, the finger pointing, and the mutual recriminations that emerged in the run-up to the Brussels summit underscore the need for a deeper and broader U.S.-EU dialogue on economic policy to better manage the current crisis and to forestall a future one.

The transatlantic market is the largest single nexus of trade and investment in the global economy. The twin economic crises of the last few years — the 2008 financial crisis and the eurocrisis — have merely underscored the structural interdependence of this transatlantic economic space. Sovereign debt issues, banking insolvency, and current account imbalances on one side of the Atlantic create problems that now rapidly spread to the other side.

As it became apparent that this was not simply a European crisis, but one with transatlantic ramifications, the euro’s problems triggered unprecedented concern and second-guessing in Washington. This has not been well received in Europe, where U.S. President Barack Obama and U.S. Secretary of the Treasury Timothy Geithner have been accused of meddling. Europeans have been quick to argue that the U.S. fiscal position is even worse than that in Europe, giving Washington no room for offering unsolicited advice.

With the eurocrisis far from being resolved and U.S. budgetary and debt woes likely to be of growing concern to financial markets in the future, the tension that has arisen over the eurocrisis is a harbinger of friction to come.

The intergovernmental agreement reached in Brussels on mutual budgetary oversight will go a long way toward institutionalizing an unprecedented degree of intra-European dialogue on economic issues that were heretofore considered purely domestic in nature. In that spirit, albeit with a less-ambitious goal, it is time for the United States and the European Union to launch a regular transatlantic structural economic dialogue. The goals should be to act as an early warning system for future economic difficulties, to better understand differing perspectives on mutual challenges, and to better coordinate macroeconomic policies between the EU and the United States.

There is already close coordination between the U.S. Federal Reserve and the European Central Bank (ECB) and frequent interaction between the U.S. Treasury and the finance ministries of key European countries. But with the EU likely to gain significant new fiscal powers in the years ahead, it is time to broaden that dialogue to include budgetary and finance ministry officials, members of the U.S. Congress, national parliaments, and the EU parliament, and, most important, representatives of financial markets so that their interpretation of proposed policy actions can be factored into decision-making.

In the 1980s, the United States conducted an enlightening, but largely one-sided, Structural Impediments Dialogue with Japan. Both the EU and the United States now have strategic dialogues with China and others. And each member of the G20 now subjects its economic policies to a Mutual Assessment Process, essentially a peer review managed by the International Monetary Fund, to judge each country’s performance in the joint effort of achieving balanced global growth. A nation deemed to be pursuing policies that undermine that goal will face peer pressure to change direction. This ambition may not be achievable between nations as disparate as China and Mexico. But given their common stake in the global economy, their shared values, and history of cooperation, Europe and the United States can lead the way in establishing the norms for and expectations of how nations harmonize fiscal and monetary policies that were once purely domestic in nature, but that now are globally relevant.

To that end, the United States and the European Union should:

• Launch an annual strategic economic dialogue involving officials from the U.S. Federal Reserve, the ECB, the U.S. Treasury, finance ministers from European Union member states, relevant officials from the European Union, and financial market practitioners.

• The agenda should include peer review of each other’s economic assumptions, structural impediments, policy goals, and actions.

• The goals should be to minimize misunderstanding, to remove structural and policy impediments to growth, and to facilitate eventual transatlantic market integration.

Bruce Stokes is a Senior Transatlantic Fellow in the Economic Policy Program of the German Marshall Fund.

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WASHINGTON—In recent days, discussion in both Washington and Brussels has focused on Europe’s sovereign debt problems. But hunkering down is a prescription for prolonged suffering. In the face of a major challenge like the euro crisis, the best defense is a good offense.

The euro crisis has demonstrated once again that the economic fates of Europe and the United States are inextricably linked. Persistent joblessness on both sides of the Atlantic together with flagging consumer and investor confidence have shaken the transatlantic marketplace more than any other event since the Great Depression. The need for closer economic cooperation has never been greater.

Both Americans and Europeans are telling their elected leaders that they need jobs and growth. But their mutual debt burdens and the near exhaustion of monetary policy options means both Washington and Brussels must look elsewhere to spur their economies. The most promising and immediate way to do this is by launching a Transatlantic Jobs and Growth Initiative anchored in an effort to remove all taxes on and barriers to transatlantic trade and investment.

Never has such an effort been more timely or more necessary:

• Unemployment is stubbornly high in both the United States and the European Union. There is little prospect of a rapid economic recovery. New sources of growth are desperately needed.
• The Doha Round is dead and there are no prospects of growth-inducing multilateral trade liberalization in the near future.
• The United States already has free trade agreements with Canada and Mexico, and the EU has one with Mexico and is negotiating a deal with Canada. It makes little sense not to have an EU-U.S. accord.
• China poses an unprecedented competitive challenge that is best met by the European Union and United States working together.
• The window of opportunity is closing. A decade from now, both Europe and the United States will trade more with China than with each other and the incentive to integrate the transatlantic market may be lost forever.

The benefits of such an effort could prove significant. A 2010 study by the European Center for International Political Economy in Brussels estimated that elimination of all EU tariffs on U.S. goods would boost U.S. exports to Europe by $53 billion and European exports to the United States by $69 billion. A 2009 European Commission study found that eliminating all actionable transatlantic nontariff trade barriers would add $53 billion to the U.S. economy and $158 billion to the EU economy.

These estimates are a reminder that transatlantic barriers to trade and investment may be small compared with the obstacles U.S. and European exporters face in other parts of the world. But their removal would still pay significant dividends.

To put these prospective benefits in context, the payoff from eliminating transatlantic trade barriers exceeds the likely economic benefit to the United States or to the European Union from completion of the Doha Round. It also exceeds the potential economic benefit to the United States of the Trans-Pacific Partnership now under negotiation.
Brussels and Washington are selling short their own interests by not harvesting these benefits now.

Interest in a Transatlantic Jobs and Growth Initiative is mounting. The U.S. Chamber of Commerce has called for the elimination of all barriers to goods traded between Europe and the United States as a first step toward a full free trade agreement. The U.S. Coalition of Services Industries has suggested pursuit of a transatlantic free trade area in services. The Transatlantic Business Dialogue advocates the establishment of a Barrier-Free Transatlantic Market. The Transatlantic Policy Network, made up of members of Congress, the European Parliament and transatlantic business leaders, has recently called for creation of a Transatlantic Market by 2020. And, in late September, the European Parliament called for a “comprehensive Transatlantic Growth and Jobs Initiative.”

At the U.S.-EU summit on November 28, President Obama and his counterparts in Europe should instruct their respective teams to come up with a Transatlantic Jobs and Growth Initiative, which should be ready to be signed in mid-May 2012 at the G8 summit in Chicago. The Initiative should have multiple pillars: these should include elimination of all tariffs, free trade in services, and an investment agreement, among other things. Most important, these efforts should run in parallel, but not be dependent on each other. Tariffs can be eliminated relatively rapidly. If it takes longer to hammer out an agreement on services, that should not deny Europe and the United States the benefits of eliminating taxes on goods.

The euro crisis presents a unique opportunity for political leadership. Americans and Europeans want jobs, they want growth, and, above all, they want a reason to hope. What they lack is a sense of direction and purpose from their leaders.

A Transatlantic Jobs and Growth Initiative is a way to turn the euro crisis into an economic opportunity for all Americans and Europeans.

Bruce Stokes is a Senior Transatlantic Fellow at the German Marshall Fund in Washington.

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WASHINGTON — The world faces a near-perfect financial storm of unprecedented proportions. Europe and the United States face debt and deficit problems that are coming to a head at the same time, threatening to plunge both economies into recession.

There is a single unifying theme to this transatlantic crisis: a profound failure of economic governance on both sides of the Atlantic.

For Europe and the United States to get their fiscal houses in order, they must simultaneously fix the ways they tax and spend. Both America’s economic governance, with its roots in 18th century concepts of Congressional preeminence and federalism, and Europe’s unwieldy division of monetary and fiscal responsibility, barely a decade old, are not up to the challenges of a global economy driven by international capital markets that can mercilessly punish fiscal shortcomings.

The recent economic downturn exposed the fraudulence of the Greek government’s accounting, the lack of Portugal’s competitiveness, and the hollowness of Ireland’s real estate boom. Meanwhile, Washington’s spending to forestall a Depression pushed U.S. public debt to unsustainable levels.

Yet three years after this downward spiral began neither Europe nor the United States is on top of their problems. Greece faces almost inevitable default on its sovereign debt, with the danger it could pull down with it Portugal, French and German banks, and the euro. And America risks defaulting on its debt, raising the cost of credit for all Americans for years to come.

In the face of this crisis, European and American officials have repeatedly kicked the can down the road, putting off until tomorrow decisions that should have been made today. And they are likely to do so again this month.

When first faced with the Greek, Irish, and Portuguese debt problems, European leaders dragged their feet and then bought time with inadequate bailout packages. Debt restructuring and bank recapitalization to shore up the European financial system were postponed because they were too difficult. Now, facing new concerns about the solvency of Spain and Italy, Europe appears likely to take half measures that staunch the bleeding, but do not cure the patients.

Similarly, for several years Washington has faced a growing mismatch between spending and revenues. But as recently as last December’s budget agreement, the White House merely stitched together a compromise that delayed the day of reckoning. Now, facing the need to raise the national debt ceiling, Congress is scrambling to come up with a compromise that will simply get politicians past the next election, not create a framework for resolving the U.S. fiscal situation.

There is a dangerous mismatch between the need for both Washington and Brussels to make tough fiscal decisions and the needs of their economies.

The U.S. Constitution gives Congress the power to tax and to spend. But Congress frequently dodges that responsibility by failing to pass a budget. Rather, to demonstrate its symbolic commitment to fiscal forbearance, it has created a periodic vote to raise the national debt ceiling, which has needlessly created the current crisis. Moreover, the United States has heedlessly tied its hands in its search for new revenues. A national value-added tax, which would generate much-needed revenue, is off limits because in America’s federal system sales taxes are the jealous preserve of the states.

Europe created a single currency and a common monetary policy without a common fiscal policy to back it up. Without the power to tax or to raise money through the issuance of euro bonds, Brussels lacks the funds necessary to stabilize the European economy in a time of crisis or to fix the financial system by recapitalizing weak banks. It must resort to passing the hat among national governments, which has led to stopgap measures that fail to fix the underlying problems.

Both Europeans and Americans need to confront their economic governance problems head on.
A deal now under consideration in the U.S. Senate would give the president unprecedented ability to raise the debt ceiling, subject to Congressional disapproval, and would create a fast-track procedure for raising revenue and cutting spending. Both initiatives attempt to break the logjam on fiscal decision-making. But more is needed to bring revenues in line with spending, possibly including spending limits so successfully employed in Sweden and a European-style value-added tax.

Europe is inching toward some form of euro bonds and a collective oversight of the 27 member-country budgets. But the former must be more robust and the latter needs teeth if it is to be effective. The euro will never rival the dollar as long as Europe cannot issue securities comparable to U.S. Treasury bonds. And with Germany having added a balanced budget amendment to its constitution, much like 49 of the 50 U.S. states, Brussels desperately needs the counter-cyclical spending power Washington now enjoys.

Debt-ceiling fights and dangers of default make headlines. But they reflect underlying failures of economic governance that plague governments on both sides of the Atlantic. Until Washington and Brussels reform how they raise revenue and spend money, they are likely to continue to delay tough decision-making on fiscal policy, forestalling an immediate crisis while raising the likelihood of a cataclysmic perfect storm down the road.

Bruce Stokes is a Senior Transatlantic Fellow with the Economic Policy Program of the German Marshall Fund in Washington.

Photo by Orin Zebest.

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WASHINGTON–2011 promises to be the year when the European sovereign debt crisis finally comes to a head. Cascading political and financial deadlines in the first third of the year threaten to dramatically accelerate what had heretofore been a slow-motion train wreck. This rapidly unfolding euro calamity is likely to force Germany to assume significantly greater responsibility for Europe’s economic future. And it may require the United States to become more involved with failing European states. Faced with this prospect, both Berlin and Washington should be proactive, not reactive.

Europe’s economic woes are profound, deeply seated, and highly contagious. In the 16-member eurozone the government debt-to-GDP ratio rose from 69.8% in 2008 to 79.2% at the end of 2009. (The euro zone now has 17 members, Estonia joined on January 1, 2011.) And, among the 27 members of the European Union, debt  increased even more, from 61.8% to 74%. And it is projected to balloon further in years to come.

Many economists believe that indebtedness over 60% spells trouble. In 2009, 12 EU member governments had debt ratios higher than 60 percent of GDP, including Greece (126.8 percent), Italy (116.0 percent), Belgium (96.2 percent), and Hungary (78.4 percent).

These persistent and growing debt levels have spooked financial markets, which have begun to charge some European governments onerous interest rates to borrow new money or to rollover existing debt. Higher servicing costs have only compounded Europe’s debt problems, forcing first Greece ($146 billion) and then Ireland ($112 billion) to seek bailouts from their fellow EU members and the International Monetary Fund.

So far, other governments have been willing to pony up bailout money because their banks hold massive amounts of debt issued by some of Europe’s most vulnerable economies. French banks hold $2 trillion in debt issued by other Europeans and German banks hold $1.8 trillion–amounts equal to about the size of the French economy and nearly two-thirds of the German economy. With German and French banks undercapitalized, they could not stand the shock of a sovereign default or debt restructuring.

This dire situation threatens to worsen in early 2011. Both Portugal and Spain need to rollover tens of billions of euros in government debt in the first quarter of this year. In late December, Lisbon was paying 3.5 percentage points more to borrow than was Berlin. And Madrid was paying 2.5 percentage points more. Ominously, Portugal’s borrowing costs have quadrupled in the last year and Spain’s have doubled.

Compounding the problem, Portugal has a presidential election in January 23, which is likely to freeze government decision-making until the vote. Soon thereafter, however, Lisbon is likely to face pressure from other EU members to accept a bailout, if only to build a firewall to keep the euro crisis from spreading to Spain. Spanish banks hold $78 billion in Portuguese debt.

Ireland then holds a parliamentary election in February or March. Heated rhetoric in the run-up to that vote is likely to raise new doubts about Dublin’s willingness to go through with promised belt-tightening. The opposition Fine Gael and Labor parties are likely to promise voters to renegotiate terms of Ireland’s bailout if they win, forcing the holders of Irish bonds to share the burden of adjustment. Market jitters are almost inevitable.

New European bank stress tests could trigger market perturbations as early as February, when the methodology for such examination of the banks’ books is expected to be announced. The new inquiries need to be tough to be credible. But if they are tough, they are likely to paint a bleak picture of many European institutions, creating new anxiety among investors.

With the day of reckoning at hand, Germany, the biggest of Europe’s rich countries, will be under pressure to ride to the rescue, much to Germans’ dismay. So far, Berlin has resisted building a larger European bailout war chest or backing issuance of eurobonds that could absorb those issued by beleaguered European governments. But German taxpayers have to realize that they can either pay to help bailout Portugal and Spain or they will pay to bailout their own banks. And it will be cheaper to do so early in 2011, before the crisis spreads to Italy and costs explode.

The United States must also accept that its stake in the euro crisis dictates a more active American engagement. Europe is the second largest U.S. trading partner, a significant portion of American corporations’ profits are earned in Europe, and U.S. banks hold $1.4 trillion in European debt.

Washington needs to support more IMF involvement in future European bailouts, with more money and more intrusive oversight, back additional swap arrangements between the European Central Bank and the U.S. Federal Reserve, and generally pressure Europe to stem the current crisis before it spreads further by bulking up the European bank bailout fund, by creating eurobonds, and by moving rapidly toward a common European fiscal policy.

The euro crisis is entering a new and dangerous phase. 2011 could prove to be annus horribilis if Germany and the United States do not step up to the plate and accept greater responsibility for resolving a crisis that could yet wreak havoc with the transatlantic economy.

Bruce Stokes is a Senior Transatlantic Fellow at the German Marshall Fund in Washington.

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WASHINGTON — The rapidly unraveling Irish debt crisis is stark evidence that the consequences of the 2008 financial meltdown will take years to play out. It is a reminder that the United States has a major stake in Europe’s handling of this problem. It highlights the dangerous mismatch between the reassurances bond purchasers need to keep funding sovereign debt in the short run and the long-term desirability of financial markets being more prudent in their lending to profligate governments. And it underscores the damage recent German economic chauvinism has done to the delicate diplomatic dance needed to manage such crises.

To manage this crisis, and to ensure that there is not another European sovereign debt crisis in six months, Europe needs to move rapidly to implement sovereign debt restructuring plans backed by massive financial resources raised jointly, not from the reluctant Germans.

In response to the implosion of its real estate market in the wake of the financial crisis and the threatened failure of major lending institutions, the Irish government nationalized three banks, backing them with a $61-billion (45-billion euro) bailout. Such expenditure of taxpayer funds, combined with a 7.6 percent contraction of the economy in 2009, has pushed the Irish government’s deficit to a daunting 32 percent of GDP.

Budget cuts have yet to staunch the bleeding, and more belt-tightening is expected in December. While the government if fully funded through the middle of next year, if it were to borrow today, it would have to offer bond purchasers a prohibitive 5.9 percent premium over what Germany would have to pay on ten-year bonds.

To ease financial market concerns about repayment, the European Union, the European Central Bank, and the International Monetary Fund are scrambling to piece together a rescue package. So far Dublin has been reluctant to request a bailout lest the precedent make it a suspect borrower for years to come.

Both other Europeans and Americans have reason to worry. European banks have half a trillion dollars in outstanding loans in Ireland, nearly more than three times European exposure in Greece, which the European Union eventually agreed to bail out earlier this year.

But it is crisis contagion that has some economists worried. Portugal, which has done even less than Ireland to deal with its economic woes, has to tap financial markets early next year. Failure to contain the Irish crisis could undermine Portugal or even blow back on Greece, where the budget deficit continues to grow despite its earlier rescue package and budget cuts.

All this raises new concerns about Europe’s struggling and disparate recovery. Germany grew by only 0.7 percent in the third quarter of 2010, Spain did not grow at all, and Greece’s economy shrunk by 4.3 percent. If Irish loans begin to go bad, weak German banks, which have nearly $139 billion in Irish exposure, would take a hit.

This would be bad news for the United States. America’s recovery is premised on rising exports. Historically, that has only been accomplished during a period of a weak dollar. Since June, the dollar has strengthened by 17 percent against the euro. Since Europe is one of the biggest buyers of American exports, the Obama administration’s goal of doubling U.S. exports over the next five years is in jeopardy.

In bailing out Ireland, Europe faces a conundrum. Much of the current flurry around the Irish debt situation was triggered by German insistence that any European government bonds issued after 2013 would contain provisions ensuring that the buyers of those bonds would lose some of their principal if the issuing government ever got in trouble again. In the Greek crisis, taxpayers picked up the bill for the bailout, not bond holders.

This makes political sense. And it would force bond buyers to demand higher interest rates to cover their additional risk, disciplining governments to borrow less.

But even talk of some future arrangement has spooked financial markets today.

The perceived arrogance of the German government in this crisis has also not spurred confidence in Europe’s ability to cooperate. Berlin has suggested Dublin raise its corporate tax rate to boost revenues, and, not coincidentally, curb its competitive advantage in attracting business investment. Nor did Germany’s recent refusal to cooperate with the United States on reducing global trade imbalances endear it to Washington.

Brussels and Dublin are likely to stitch together a bailout, with help from the IMF and the implicit support of Washington. But the Irish crisis is a reminder that Europe is involved in a slow-motion train wreck. Before Portugal or Greece, again, becomes a problem, this time threatening Spain and Italy, IMF and Washington support should come with stings attached.

Europe needs to rapidly put in place rules requiring bond holders to pay the price of post-2013 bailouts, to remove the uncertainty that is currently destabilizing markets. Moreover, it needs to create a European Monetary Fund that is sufficiently large enough to convince speculators they will lose money if they bet against the European Union’s ability to bailout its member governments. And it needs to be able to issue large quantities of European bonds—backed by EU as a whole–to fund that effort, as a first step in creating a long-overdue common European fiscal policy.

At the recent G20 summit in Seoul, Europeans, especially the Germans, rightly lectured the United States about getting its house in order. Now it is time for the Europeans to take their own advice.

Bruce Stokes is a Senior Transatlantic Fellow of the German Marshall Fund of the United States.

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WASHINGTON — American elections are largely driven by domestic concerns, but their outcomes have global ramifications. Never has this been more evident than in the wake of this year’s U.S. Congressional elections, which produced an overwhelming Republican majority in the U.S. House of Representatives and returned a razor-thin Democratic majority in the U.S. Senate.

The Republican Congressional ascendancy reverberates across the Atlantic. Europeans hopeful of cooperation with the United States on Afghanistan, arms control, the global economy, and climate change will notice that Washington is about to become an even more frustrating partner.

The Afghan war was not a Congressional campaign issue. But President Barack Obama has pledged to begin withdrawal of U.S. troops from Afghanistan by mid-2011. Europeans, who largely support reducing the Western military presence in Afghanistan, are joined by only 22 percent of Republican voters in the United States who support such a policy, according to the recent German Marshall Fund Transatlantic Trends survey. When, and if, Obama begins an Afghan pullback, Congressional Republicans will only complicate allied cooperation on Afghanistan.

The Obama administration, along with its European allies, wants to negotiate with Tehran about its nuclear weapons program. But American Republicans support a far more aggressive posture: one-in-five respondents of the Transatlantic Trends survey would take military action now to prevent Iran from acquiring nuclear weapons and more than four-in-five would take such action if non-military efforts fail. Republican hawks on Capitol Hill are likely to be sharply critical of any administration pursuit of a negotiated settlement to the Iranian standoff.

There is also a widespread European desire for the White House to advance the Israeli-Palestinian peace process. But only 12 percent of Republicans approve of Obama’s handling of the Middle East. Obama’s ability to leverage the Israeli government to make concessions to the Palestinians is likely to meet opposition from Congressional Republicans supportive of an Israeli hard line.

The reduction of American and Russian nuclear arsenals has long been a European goal. But the Obama administration was unable to corral the two-thirds majority needed in the U.S. Senate to pass its recently completed arms control treaty with Moscow. Passage will prove even more elusive next year.

The new Republican Congressional leadership has pledged to cut government spending, suggesting they have more in common with Germans than with Democrats. But austerity-minded Europeans need to be mindful that this belt-tightening may be more rhetoric than reality.

Republicans promise not to cut Social Security (pensions), Medicare and Medicaid (health care for the elderly and the poor), and defense spending, which account for more than three-fifths of the U.S. budget. Moreover, Republicans plan to extend Bush-era tax cuts at a cost of $370 billion a year in lost revenue. Congressional Republicans have also pledged to repeal Obama’s recently enacted health care reform that could save the U.S. Treasury $10 billion a year. European hopes that a Republican House might force a reduction in destabilizing U.S. debt may prove illusionary.

Prospects for meaningful U.S. action on climate change, long a European priority, are even more remote. Obama could not pass climate change legislation this year despite having a nine-seat majority in the U.S. Senate. Next year, U.S. climate change legislation is dead. White House promises to pursue emissions controls through executive regulation are likely to be frustrated by Republican plans to withhold funding for enforcing such rules.

Finally, some Europeans hope that the divided government produced by the election will force American Republicans and Democrats to cooperate in governing. But the trench warfare that has plagued Washington for the last two years is about to get worse. Republicans have promised to begin Congressional investigations of the White House, which are likely to poison Congressional-White House relations, whether or not wrongdoing is found. And Republicans, who have won back the House of Representatives through obstructionism, may decide that two more years of such behavior can win them back the White House in 2012.

Europeans did not get a vote in this year’s U.S. Congressional elections. But they have to live with the results. It could prove a frustrating experience.

Bruce Stokes is a Senior Transatlantic Fellow with the German Marshall Fund in Washington, DC.

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WASHINGTON — The recent central bankers’ conference in Jackson Hole, Wyoming, highlighted yet again that there exist yawning transatlantic differences in perspective on the global economic challenge ahead and, more important, what to do about it.

This policy debate, with Europeans urging fiscal austerity and Americans promoting continued economic stimulus, has been a sore point for months. Now it is evident that leading European and American economists even disagree on their interpretation of history, with both sides using Japan’s economic stagnation in the 1990s as evidence in support of their preferred course of action today.

This debate is not just about what Tokyo did or didn’t do two decades ago. Transatlantic differences over Japan’s experience are really about whether inflation, the European obsession, or deflation, the American concern, poses the greatest threat to the world economy today. These contrasting European and American perspectives reflect deep-seated economic scars on the European and American psyches, products of their own economic trauma in the early part of the 20th century.

Make no mistake about it. This is no academic debate best resolved by Japanologists. It is rooted in differences in transatlantic experience that may never be resolved and are of great consequence for the global economy.

“Some have suggested,” said Jean-Claude Trichet, president of the European Central Bank, at Jackson Hole, “to ignore existing financial imbalances ‘for the time being’ and focus only on the short term. Rather than pressing on with the deleveraging process, more spending could be encouraged to sustain growth in the short term.”

“I believe,” he continued, “that adopting this view would be very dangerous for our economies. There is a very clear example of the consequences of choosing to live with the debt: Japan in the 1990s [with its] ‘lost decade’.”

American economists, such as Nobel-prize winner Paul Krugman, disagree. They argue that Japan’s lost decade was a direct result of turning off the fiscal spigot too early. “The lesson from Japan,” he told the Toronto Globe and Mail recently, “is that despite cutting interest rates, Japan has never had a real recovery. There was enough government spending to keep the economy from plunging, but never enough to generate a boom. And private market forces never kicked in.”

How can Europeans and Americans read such different lessons from Japan’s experience? It actually has little to do with Japan and much to do with contrasting transatlantic trauma before World War II.

Current European views, especially at the European Central Bank, are shaped by Germany’s scarring experience of hyperinflation in the 1920s. When Trichet warns about debt, his real concern is to avoid the inevitable inflation that governments have often used to dig themselves out of debt traps, paying off their obligations in debased currency. When Krugman and members of the Obama administration advocate more government spending, it is to head off a repeat of the debilitating deflation America experienced in the 1930s’ Depression.

In this debate by Japanese proxy, it is instructive to point out that students of Japan’s lost decade tend to agree with Krugman, not Trichet.
Richard Koo, chief economist for the Nomura Research Institute, argues that in Japan “fiscal stimuli were applied intermittently and almost always behind the curve, after the effect of the previous stimulus had expired and deflationary pressure had been allowed to again weaken the economy. This on-and-off approach ended up increasing the cumulative deficit and lengthened the recession unnecessarily.”
At the time, Japan suffered what Koo calls a “balance-sheet” recession in which “businesses and individuals were saddled with excess liabilities and were forced to pay down debts by curbing consumption and investment. The last thing they were interested in was increasing their borrowings.”

Rather than maximizing profits, individuals and corporations became obsessed with reducing debt. In the face of such caution, monetary policy was ineffective in stimulating borrowing again, despite the Bank of Japan’s cutting short-term interest rates close to zero.

In such a business climate, Koo says, “if everyone is deleveraging and the government does nothing, then the economy falls into deflation.”

Washington and governments in Europe have moved much more rapidly than Tokyo did in the 1990s to turn on the fiscal spigots. But Koo wonders whether policy makers realize just how long the spigots may need to remain open, especially in the United States, where business and individual debt greatly exceeds government debt.

“Given the size of the problem,” Koo warns, “there is absolutely no reason to believe that balance sheets will be repaired with just one pump-priming action by the government.”

Trichet could undoubtedly cite his own Japan experts to counter Koo. But any further such “he said, she said” debate about Japan is a counterproductive distraction.     Europeans and Americans need to stop talking about Japan. They need to acknowledge that their own historical experience may constrain their policy perspective today. And then they need to have a frank debate about current prospects of inflation or deflation.

It may well be that Europe and the United States face different threats going forward. And if Europe’s challenge is rising prices and America’s is falling prices, managing the global economy will be much, much more difficult in the months ahead.

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The US should press the International Monetary Fund to organise a Mexican-style credit line for Portugal and Spain.

The rapidly metastasising Greek financial crisis threatens President Barack Obama’s economic recovery strategy for the United States. And if Greece’s troubles spread, undermining the Portuguese, Spanish and, eventually, the EU economy, the US €“ and possibly the transatlantic relationship €“ will pay a heavy price.

The US stake in containing the Greek contagion is significant. American banks hold about $190 billion ( ‚¬144bn) in debt from Europe’s five most troubled economies: Greece, Ireland, Italy, Portugal and Spain. If a significant portion of that debt must eventually be written off, and some financial analysts think as much as half may be so threatened, the American banking system would take a serious hit.

But it is the secondary consequences for the US that may be the most profound. The EU is the single largest buyer of US exports. Moreover, US companies have more invested in Europe €“ and their foreign affiliates have more sales in Europe €“ than in any other part of the world.

If the Obama administration has any hope of meeting its goal of doubling US exports over the next five years, sales to Europe have to rise dramatically. But American merchandise exports to Europe were down by $51bn ( ‚¬39bn) last year.

Until recently, the current US economic rebound has been fuelled, in part, by a weak dollar. But the dollar, which fell by 16% in value against the euro between February and November 2009, has strengthened by 9% since then. And there is every prospect that the dollar will strengthen further, as investors move their money out of European banks and into the relatively safe American financial system.

A stronger dollar means even fewer American exports to Europe. As important, a weaker euro will make European exports more attractive in China, India and other emerging markets, eating into the US’s market share in those economies, which are now the fastest-growing in the world.

A Europe in crisis, preoccupied and economically hobbled, will also have adverse foreign and security policy consequences for the US. Washington has been pushing its NATO allies to spend more on defence. That prospect has now become even dimmer. European companies facing stagnant domestic markets may resist the ever-tighter sanctions against Iran being pushed by the Obama administration. And a bickering, divided Europe will be more easily manipulated by Moscow, not exactly what Washington had in mind when it called for a “re-set” of Russian policy.

Direct US intervention in the European financial crisis is not now on the cards. But to forestall a cascading collapse of indebted European economies, the Obama administration should call on the International Monetary Fund (IMF) to establish a precautionary credit line for Portugal and Spain similar to the $47bn ( ‚¬35bn) arrangement set up for Mexico in April 2009, when that country faced speculative attacks on its currency and banking system. It would signal to financial markets that betting against Lisbon and Madrid may yet prove a losing proposition. Moreover, it would be good domestic politics for Obama, who does not want a global economic crisis in the run-up to mid-term elections in November, in which his party is likely to lose control of Congress.

Such a proactive move would need the assent of Paris and Berlin, because it would call into question European sovereignty and the future of the euro. But desperate times require desperate measures. And US economic and national-security self-interest dictates that it lean on its allies to begin erect some storm walls to contain this financial tsunami.

Bruce Stokes is the international economic columnist for the National Journal and a transatlantic fellow at the German Marshall Fund.

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The European Parliament now has the US Congress’s attention. Here are seven ways its attention could be kept.

The administration of US President Barack Obama had a rude awakening in mid-February, when the European Parliament voted to block further US access to banking data on European citizen from SWIFT, a financial network owned by banks, in order to track terrorists. Washington has long ignored the Parliament, or at best tolerated it. But with this one vote, the Parliament has finally won the attention of leading Americans.

This incident was just the tip of the iceberg. Other problems will surface, such as the upcoming Anti-Counterfeiting Trade Agreement. Many of these involve profound transatlantic differences over the appropriate protection of civil liberties. Such disagreements can only be hashed out politically through closer interaction between elected leaders who have the authority and responsibility to balance conflicting societal goals.

So the challenge ahead is to avoid similar dust-ups that could further sour the Obama administration on the EU.

Washington’s belated recognition of the Parliament’s new-found influence creates an opening to broaden transatlantic co-operation. Interaction between various branches of the US government and the European Commission is already at unprecedented levels. For the first time, major US regulatory agencies have now stationed staff in Brussels, consulting them each day on trade and competition matters. What is lacking is adequate interaction between Congress and the European Parliament.

To deepen that tie, and effectively create an early warning system to avoid future SWIFT-type friction, the US Congress should do the following:

• Establish a Congressional presence in Brussels: The Parliament has opened an office in Washington, DC, with three staff members. Congress should do the same in Brussels, to help track legislation, to provide input on parliamentary initiatives that might affect transatlantic relations and to co-ordinate Congressional interaction with MEPs.
• Designate a liaison: Encourage relevant legislative committees on both sides of the Atlantic to designate one member to act as the liaison with its counterpart.  
•  Build up staff ties: The Parliament will rotate staff in its Washington office. A formal exchange programme ought to be developed, with US Congressional staffers spending a year working in the Parliament. Over time, this personal experience could prove invaluable in sorting through policy differences. More importantly, it would build up personal relationships that would enable staff members to iron out, through a phone call, minor differences before they become major disagreements.
• Hold parallel hearings: When appropriate, Congressional and Parliament committees should hold parallel hearings as legislation develops on particular issues on both sides of the Atlantic. Members of Congress should regularly testify before the Parliament and vice versa. This practice has begun and should be regularised.
• Hold joint fact-finding visits to third countries: Parliament and Congress should co-ordinate visits to China, India and similar countries to ensure a common understanding emerges and to present a common front on mutually important issues.
• Strengthen the Transatlantic Legislators’ Dialogue: There are plans to develop the long-established Transatlantic Legislators’ Dialogue by bringing together members of Congress and of the Parliament to work in small groups on specific issues. This is a positive development that should be reinforced through assigning these groups specific tasks, such as coming up with parallel pieces of new legislation.
• Create a transatlantic assembly: Congress and the Parliament should consider transforming the current Legislators’ Dialogue into a transatlantic assembly. When there are serious things to talk about, legislators will engage. For example, the latest gathering of the NATO Parliamentary Assembly (in November 2009) brought together a dozen members of the US Congress, half a dozen MEPs and more than 150 parlia-mentarians from the EU’s member states.

Congress and the Parliament will never see eye to eye completely. But there are ways to minimise differences and foster co-operation. To date, the Parliament, as the new kid on the block, has made the greatest effort to engage. The SWIFT vote demonstrated it is time for the Congress to try harder.

Bruce Stokes is a transatlantic fellow with the German Marshall Fund of the United States and an international economics columnist for the National Journal.

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The US is less engaged in the response to Greece’s crisis than it should be. For the US, and the EU, a role for the IMF would be good.

In recent weeks, the Greek debt crisis now embroiling European bond markets has been seized upon by conservative commentators in the United States as evidence of the troubles awaiting the US if it does not decisively cut government spending.

This use of Greece’s plight as yet another debating point in Washington’s ideological struggle over the role of the state in the economy short-changes the US’s long-term economic, security and foreign-policy interests in an effective European response to this crisis.

Europe is the US’s largest export market. But, in part due to the Greek crisis, the euro has fallen in value by 8% against the dollar since November 2009, making US products more expensive for Europeans. An extended period of weakness for the euro would undermine the ambitions of President Barack Obama’s administration to double US exports in the next five years.

Moreover, any threat to the euro and the cohesion of the EU runs counter to US interests. Washington has long supported European enlargement, for example, as a means of spurring economic growth and democracy in central and eastern Europe. The Greek crisis could easily slow down the EU’s expansion.

In addition, the intra-European strife that the Greek turmoil may engender will make it even harder to get unified European positions on issues of interest to the US, such as climate change and global financial regulation.
Obama should therefore rethink his decision not to attend the proposed US-EU summit in May. Obama needs to be there to show solidarity with the Europeans in their hour of need, to encourage them to get their act together, and to forcefully articulate US interests in their crisis management.

In particular, Obama should lean on Angela Merkel, Germany’s chancellor, to stimulate consumption in Germany, so as to ease the intra-European trade imbalances. In times of trouble, surplus countries have responsibilities, just as deficit nations do.

Moreover, Obama should articulate Washington’s interest in having the International Monetary Fund (IMF) manage and fund a Greek bail-out. It is understandable that Europeans want to clean up their own mess. But self-reliance is only admirable if it has a reasonable prospect of working. The European Commission lacks experience of overseeing the kind of structural reforms needed in Greece. And Berlin, which would have to be the largest pay-master for any bail-out, faces populist opposition to writing cheques to Athens €“ opposition that could easily undermine the Merkel government at a time when Washington needs it on other issues.

The IMF is already helping Hungary, Latvia and Romania restructure their economies. Moreover, the IMF can tap its own reserves to help pay for the effort, which, from a US geopolitical viewpoint, would be preferable to Greece borrowing from Russia or China. And the IMF could serve as a useful scapegoat for the populist anger that the necessary cutbacks in Greece’s public spending will create. For the sake of the US’s interest in future European solidarity, it would be better if the inevitable protests in Athens were to vilify the IMF rather than Brussels and Berlin.
Athens and Brussels face no easy policy choices in the weeks ahead. To paraphrase that renowned economist Woody Allen, Europeans are at a crossroads. One path leads to utter hopelessness and despair, the other to total extinction. Americans can only hope that Europeans have the wisdom to find a better path. And, since the choice they make will affect US interests, Washington can ill afford to stand on the sidelines.

Bruce Stokes is a transatlantic fellow with the German Marshall Fund and a columnist on economics for the National Journal.

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