UPDATE 2-U.S. urges Europe to act to avert prolonged stagnation

Thu May 23, 2013 11:53am EDT

* Washington says decisive action needed "now"

* Calls on Europe to rethink push toward austerity

* Says European surplus countries should boost demand

* Calls Europe's reliance on exports "unsustainable"

By Jason Lange

WASHINGTON, May 23 (Reuters) - The United States on Thursday called on Europe to act decisively to boost its economy and counter the risk of a protracted stagnation that would undermine economic growth in America.

"Decisive action is needed now to restart demand and avoid the risk of protracted stagnation," U.S. Treasury Undersecretary Lael Brainard told lawmakers.

Europe is locked in a grinding recession that in some corners of the continent increasingly looks like a depression. Unemployment in the 17 nations that use the euro hit a record high in March at 12.2 percent. In Greece, the jobless rate has been above 20 percent since late 2011.

The currency bloc got into trouble following the 2009 global financial crisis as investors lost confidence in some members' ability to repay their debts.

Brainard, one of the Obama administration's top hands on international economics, said Europe should rethink a broad push toward fiscal austerity and some countries should be given more time to get their budgets in order. She said countries with more "fiscal space" should shift toward boosting growth in their economies.

"The focus of the policy debate in Europe must now shift from restoring financial stability to developing a plan to boost demand and employment," the senior Treasury official told the Senate Foreign Relations Committee.

The United States itself has engaged in a substantial amount of austerity since the end of the global financial crisis, which was sparked by a burst debt bubble that was built around the U.S. housing market.

But the Federal Reserve has managed to keep interest rates extremely low to counter some of the fiscal drag from Washington. That hasn't been the case in much of the euro zone, where the European Central Bank, or ECB, has struggled to pump credit into the region's weakest economies.

Europe's woes have been a significant drag on the U.S. economy in recent years, and officials in Washington say a stronger European economy is also important to U.S. foreign policy. The United States and Western Europe have long operated as a diplomatic bloc, and together they dominate international economic institutions like the International Monetary Fund and the World Bank. Washington and the European Union currently aim to establish a free-trade agreement.

"We need Europe in many, many ways," said Robert Hormats, an undersecretary of State who spoke before the Senate panel alongside Brainard.

WASHINGTON FRUSTRATED

Brainard said the United States welcomed European policymakers' recent discussions on how to find ways to boost credit.

But Washington is frustrated by the region's reticence to discuss imbalances within the euro zone, which many economists see as a fundamental factor behind the European crisis. Countries such as Germany kept labor costs down to help exporters, while nations in the periphery allowed wages to rise too quickly in the years leading up to the crisis, leaving them now hard-pressed to compete internationally, economists say.

Washington wants Europe to take steps to correct this imbalance, but doing so is politically difficult in the currency bloc.

"There is little discussion of how addressing surpluses in countries that export substantially more than they import might help ease the sharp compression of demand now underway in the deficit countries," Brainard said.

She said Europe's strongest exporters had a special role to play in stimulating demand, and called on countries running current account surpluses in excess of 6 percent of their economic output to quicken wage growth and encourage greater homeownership.

Current account balances are a broad measure of the flows of goods, services and capital across borders.

In a nod to the international tension over currency policy, Brainard added that Europe as a whole was depending too much on exports as a way of supporting its economy. "That is not sustainable," she said.

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