Reach for your wallets

Tensions are rising between Washington and Brussels over the use of fiscal stimulus in the global economy.

Tensions are rising between Washington and Brussels over the extent to which fiscal stimulus must play a role in stemming the slide in the global economy. The Obama Administration has adopted the advice of Larrry Summers and most leading economists to favor a globally coordinated spending increase, Brussels (led by Germany ) favors a more cautious approach, mindful that ballooning public debt could set the stage for inflation at the first sign of recovery. It's not a serious diplomatic issue. France is, after all, still rejoining the NATO command, which says more about the state of trans-Atlantic relations than anything. But many analysts say the Europeans are in denial. I'm not sure which labor figures the Europeans are watching, but inflation seems a decidedly more remote threat at the moment than massive job losses due to a plain-old recession. Massive job losses threaten to unwind the liberalizations that Europe has managed to underake since the EU was formed, reversing labor flexibility and labor mobility and returning the European economy to the rigid, inflexible state it has long been famous for. Europeans have longer memories, of course, and so they keep mentioning the war and Hitler and Weimar inflation to back themselves up. They have at least finally cut interest rates, with the ECB finally relenting and dropping the refinance rate to 1.5 per cent. And Washington suffers from a credibility gap when it argues for increased spending. Amercica's penchant for spending now, saving never, is what set the stage for the current mess, after all. But in this case, the Obamanites are right. The risk is that current fiscal stimulus packages, if unmatched by global trading partners, will end up as subsidies for exporting nations, thereby prompting protectionist backlashes and further unwind international commerce and globalization. US president Barack Obama has, in spite of his own rhetoric, done a commendable job corking the protectionist barbs Congress put into his own stimulus package. But with banks now told they can't give jobs to foreigners, regardless of the skills they bring, his fear has to be that the $787 billion will end up in exporters' pockets and prove Congress right. Japan , for instance, spent billions during its so-called lost decade on stimulus bills that Japanese simply took and invested abroad where they could get higher returns (this was the origin of the carry trade that many economists and bankers say exacerbated the global liquidity bubble). It is incumbent on everyone to stimulate their own economies with at least as much fire-power as the US is doing. Perhaps spending-GDP is the simplest and fairest, albeit blunt, way to measure whether nations are pulling their weight. What everyone seems to agree on is that the IMF needs to have about double the funds it now has to help stem a crisis in emerging markets, particularly in Eastern Europe . Stay tuned, the bill is about to arrive for the Gulf. While talk of asking countries with large accumulated reserves to kick in for the IMF has so far focused on Germany and Japan , it is soon to turn to China and thence to the oil exporters in these parts. [e-mail]