November 24th, 2010
02:20 PM GMT
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The response of authorities to the latest stage of the crisis, where fears have moved on from individual company balance sheets to country balance sheets, has been very different.  The U.S. introduced quantitative easing (QE) and the UK followed suit, while Europe did very little.

While the European Central Bank has purchased European Sovereign bonds, this has been limited in size and, unlike the U.S., the ECB has attempted to sterilise all purchases by taking liquidity out away from banks in other ways.

The EU responded to the peripheral crisis in May by enacting a bailout for Greece and developing a structure that could be used for other sovereigns. However, the EU also recognised the need to address the core of the problem of rising deficits and ballooning Debt/GDP ratios driven by fiscal profligacy in the good times, and not merely slower economic growth.  The latter has shown up the unsustainable nature of the former, rather than actually causing it.

Therefore the EU response has been to ensure liquidity is available on condition of fiscal reforms to address the underlying problem. The result is spending cuts in most European countries with, Ireland now on its second austerity budget and among other reforms, long-needed tax reform in Greece and labor reform in Spain. Even the UK has now introduced a big fiscal austerity package.

What is clear is that the European Core - especially Germany - who have run a better balanced economy for years and suffered with slower growth in the boom times, are now re-asserting their own fiscal orthodoxy.

The Maastricht criteria was ignored during the crisis but was a key part of the original Euro creation to help the stability of a currency union that was not backed by political and fiscal union. A return to Maastricht budget deficit of 3 percent is a long way off, but the basic principles are being re-established.

In contrast, the U.S. response seems to have been to do whatever is needed to stimulate growth and jobs and worry about fiscal issues later.

The latest example is QE2 with the Fed effectively printing more money and the dollar responding accordingly. The surprise is that bar a recent move, this strategy has not resulted in higher bond yields as the U.S. Treasuries have continued to benefit from a flight to quality.

While there is general acceptance that QE1 was broadly beneficial in early 2009 for an economy on the brink of depression, there is much more scepticism of the benefits of QE2. One risk identified by numerous commentators is increased levels of tensions with international trade partners. One of the likely effects of QE will be to weaken the dollar and China has already been heavily critical of what it sees as an irresponsible and dangerous monetary policy. Other countries for example in Latin America have imposed capital controls to limit “hot money” flows out of dollars and into their own currencies.

Despite the benefits of QE1, the overall response of the economy in terms of growth and employment was disappointing. The reason was that QE failed to address the problem of lack of demand for credit as borrowers everywhere concentrated on restoring their own balance sheets.

In this environment, artificially lowering bond yield does little to encourage borrowing. At the same lending institutions are reluctant to increase loans. Banks are still generally very cautious on the outlook and are keen to keep liquidity. At the same time the introduction of new capital rules for banks means there is still doubt on future capital requirements with the only certainty being that it will be higher than before. This deadlocked scenario is known as a “liquidity trap,” and QE2 is therefore unlikely to make any bigger impact on these problems than QE1.

In short the crisis was caused by a sustained period of ever-increasing leverage with little attention paid to risk or understanding of the underlying assets.

The European response has been perhaps slower than the U.S., but has generally been characterised by ensuring that there is sufficient liquidity available to ensure that economies function where the markets are unable or unwilling to provide this.

At the same time Europe has addressed the issue of over-leverage by forcing the introduction of fiscal austerity and much need labour and tax reforms.

The U.S. approach has been to address the issue of over-leveraged consumer and corporate balance sheets by massively expanding the Fed balance sheet and continue to issue Treasuries in ever larger amounts to drive growth - leaving concern about the U.S. debt burden to a time when growth is once again strong.



soundoff (7 Responses)
  1. Richard C. Poblador

    These two gigantic regions (the US and the EU) are of totally different not only geographically but also spiritually. Only UK in the EU might come within US terms because they were brothers in general.

    November 27, 2010 at 3:15 am |
  2. Henk

    Comparing The US to the EU is complete hogwash. The US is a federal state. The EU has individual nations who are judged individually by the financial markets. Each nation can cause the idea of Europe in trouble. Yet in reality Ireland, Greece and Portugal together represent only 3% of the EU`s 500Million population. Europe will either have to develop a more single state system or have only the strongest European nations share a common currency. The EU and Euro systems are something never seen before in the history of the world. It needs to develop and adapt. Through though economic times is the best way to adapt and strengthen.

    November 27, 2010 at 6:26 am |
  3. Roelof

    USA wants inflation, because when a country has a lot of debts, it's a blessing. Some EU got a lot of debts.. so for them inflation would also be a blessing (not that of the USA). The Chinese Yuan is very much underrated, that's cheating and disturbing the markets.

    American can buy and buy (with that low Yuan) untill they drop dead, but there comes a time American have to pay. Now, America things that they can do that with inflation. The middle man is going to get hurt by that. One day he can buy a car for 10.000 $ next day he has to pay 20.000 $ for that same car and work twice as long. Now the elite, they just higher their income.

    November 28, 2010 at 11:44 pm |
  4. m.s.mohamed ansari

    World Media Association
    From

    Mr.M.S.Mohamed Ansari,
    154, Angappa Naicken Street,
    Chennai – 600 001.
    Tamil Nadu, India.

    To

    The Hon’ble Chief Justice,
    The Supreme Court,
    United States of America,
    Washington, D.C.
    Fax no: 213.547.8080

    Sir,

    Sub: Prosecution of previous President Mr. George W.Bush, for violation of International Code of Conduct.
    Mr. George W.Bush, the previous President of United States of America, initiated a war against IRAQ, without obtaining the previous sanction of United Nations Organization (UNO) on the pretext of having nuclear weapons, even though the then IRAQ government openly exhibited to the whole world that it has no nuclear weapons.
    According to the CNN WORLD report, in the war 6, 75,000 civilians killed, 7500 troops of USA and its allied forces killed and $ 3.5 Trillion Dollar spent for the war. This spending of $ 3.5 Trillion Dollar is the main cause of action for the present economic crises prevailing all over the world.
    After winning the war against IRAQ, the United States of America’s President Mr. George W.Bush, also admitted the same fact, and he openly stated that the Intelligence agency misguided him.
    Later on, even the United Nations Organization (UNO) also certified that the IRAQ has no nuclear weapons.
    Then it is the bounded duty of the United States of America and its allied forces to withdraw from IRAQ.
    But instead of withdrawing from IRAQ, the United States of America and its allied forces formed a government in IRAQ, under their control and administered the entire IRAQ, and its peoples.
    This indicates a clear violation of duty by the President of United States of America Mr. George W.Bush and also a clear case of violation of the International Code of Conduct for UNO members.
    Thus Mr. George W.Bush attracts prosecution for the above said offence.
    Thus I hereby pray this Hon’ble Court initiate criminal proceedings against Mr. George W. Bush, and give him maximum punishment for
    a) initiating the war against the IRAQ
    b) killing its innocent IRAQI peoples
    c) killing troops of USA and allied forces and
    d) The present economic crises.

    Dated on this day of 13th day of April, 2009.

    Yours truly,

    (M.S.MOHAMED ANSARI)

    COPY TO

    The Chief Justice, the International Court of Justice, The Hague, Netherlands.
    The Secretary General, United Nations Organization
    The Chief Justice, the Supreme Court, IRAQ.
    His Excellency Mr.Barack Obama, the President of United States of America, White House, Washington D.C.

    November 29, 2010 at 6:41 am |
  5. Patrick

    Different approaches yes, but the end result for both EU and the US is the same. Taxpayers are buying the risk nobody in the market wants, while banks can continue their irresponsible business.

    November 29, 2010 at 8:24 am |
  6. Lib

    'Money multiplying', when a bank borrows money over and over again, imposes an economic growth to pay that money back of more than 10000% in a 30 year time span, which is something unrealistic, impossible. I don't recall anybody ever mentioning this, but it will cause markets all over the world to crash beyond repair. Another interesting thing everybody just seems to ignore, is that China is a communist country, and it has in fact planned this all from the very beginning, namely: to fight capitalism with its own weaponry. A third ignored fact is that Barroso, the EU President is a Maoist. Now, with all your academic degrees, just put two and two together, people, and WAKE UP!

    November 29, 2010 at 5:33 pm |
  7. icon package

    Can be

    hpixel

    September 22, 2012 at 11:06 pm |

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