Austerity is the New Black; U.S and Europe Fiscal Policies Diverge

Given how close to the edge of the abyss Greece came and taking the European Union down with it a couple of months ago, fiscal policy in Europe has suddenly taken a left turn. Governments across Europe, including England and Germany, have embraced austerity measures to cut some debt out of their budgets. Some of this has come on the numerous losses by incumbent politicians who advocated spending in the past. But just the fear of “ending up like Greece” was enough to cause Europeans to re-evaluate their fiscal policies.

However, while austerity is being instituted in Europe, the United States now remains the only major country trying to spend their way out of economic trouble. At the recent G-20 summit, President Obama warned European leaders that cutting back at this juncture of the economic recovery could lead to a double-dip recession. In other words, the United States wants to continue spending money it doesn’t have and needs other partners to spend as well.

President Obama is correct in that restricting money flow will lead to slower or even negative growth in the short term. However, United States fiscal policy for the past two decades has also been short-sighted. The near economic collapse of Greece has demonstrated to other Europeans that spending is not the answer and that fiscal responsibility is required for the long term viability of a country.

The problem the United States has is with the speed of the economic recovery. 3% economic growth for decades was the norm and was an indicator of a strong and steady economy. However, we have been so used to 6-10% growth over the past two decades, that 3% economic growth today simply means a slow recovery. It is just not strong enough to recreate all the jobs that were lost in the past couple of years. Based on the current rate, it would take 8-10 years to replace all of the jobs lost. For a politician, who is up for re-election every 2-6 years, this is simply unacceptable. They need a speedy economic recovery to save their own seat in government and will spend any amount of taxpayer money to get it. We can spend the money now and worry about the consequences later, they say. The politicians and most Americans just want things to go back to the good ol’ days of the past two decades. However, those decades were built on unsustainable economic policies and after two boom and bust economic cycles, will not return.

Europe has recognized this and has taken steps to ensure their long term viability. Unfortunately, the United States is still in denial. Hopefully, United States politicians will wake up and smell the coffee soon, otherwise we might “end up like Greece.”