US Wants To See European Demand Boost

The European sovereign debt crisis was triggered by the realisation that most of the EU’s membership was living beyond its means. Governments had to find funds to shore up teetering financial institutions (for fear of an even bigger calamity) at the height of the crisis and pump money into their economies to try to boost business activities. The upshot was that many Eurozone economies (Germany included) breached EU rules which stated that Eurozone economies must not run deficits above 3% of GDP – this was one of the convergence criteria for joining the single currency.

The crisis led to concerns that peripheral economies, such as Greece, might default on their obligations. This forced up borrowing costs and ignited the European sovereign debt crisis. A key objective across the EU, therefore, was to get public deficits under control and this has led to a wave of spending cuts, tax rises and other austerity measures in most countries. The aim is not to tackle the public debt mountains, but to get the deficits under control – debt will remain the “obvious elephant” for many years to come.

The downside of expenditure cuts by central government is that it drags down domestic economic activity, leading to sluggish growth and demand and higher levels of unemployment. Both the IMF and the World Bank have urged that the world’s major economies should not sacrifice growth on the altar of austerity.

The most recent voice to chime in on the debate has been US Treasury Secretary, Jack Lew. Speaking at a press conference in Germany, he noted that: “As we continue to address many of our long-term challenges, our economy's strength remains sensitive to events beyond our shores. We have an immense stake in a prosperous Europe”. He urged that nations with capacity to do more to boost economic growth through domestic demand. This was taken as a reference to his hosts who have been in the vanguard of nations urging austerity on Europe as the way out of the current mess. Recent figures show that Germany’s imports and exports have declined, pointing to lower economic output.

Mr Lew argued that consumer demand must be the engine of economic growth. Germany would probably agree with the sentiment, but not before Europe puts its economic house in order. The elephant (and the US and Japan have particularly fine specimens) will no doubt be discussed at some future date.