Geithner Urges Europe Not to Cut

While America remains mired in recession, Treasury Secretary Geithner has some advice for Europe: don’t rein in spending now!

Speaking at the Brookings Institution in Washington DC on Wednesday, Treasury Secretary Timothy Geithner warned that European austerity measures threaten to stifle the still fragile global recovery.

This summer President Barack Obama also called upon Europe to continue stimulus spending. The rest of the G20 disagreed and agreed to cut deficits in half by 2013 over Obama’s objections.

Germany and the United Kingdom have since announced ambitious budget revisions while the European Commission wants to sanction eurozone member states that plunge too deep into the red.

Geithner didn’t specifically criticize these decisions but did attest that it “makes sense for policymakers in the major economies to continue to focus on strengthening growth rather than risking a premature shift to macroeconomic policy restraint.” He understood that countries under severe fiscal pressure, as Greece, Ireland, Portugal and Spain, had to rein in spending but discouraged other EU member states to do the same. “You have to distinguish that from the challenge faced by the major economies, particularly the major surplus countries,” he explained.

In a more obvious stab at Germany and China as well, Geithner called for a “change in the pattern of global growth. For too long many countries oriented their economies toward producing for export,” he said, “rather than consuming at home — counting on the United States to import more of their goods and services than they bought of ours.” Such countries, he added, will have to “boost domestic demand.”

It may strike the secretary as unfair but Chinese and German firms aren’t exporting to intentionally upset their balance of trade. Indeed, Chinese Premier Wen Jiabao was quite explicit recently when he said that “China does not pursue a trade surplus.”

These countries are exporting because there is demand for their products — either because those products are better or because they are cheaper than those manufactured in the United States. Germany has quickly recovered from the global crisis, in part because of revitalized exports and China is very reliant on them, but the only actor making this possible is the American consumer. It is both disingenuous and shortsighted to suggest that these countries should “boost domestic demand” in order to give American manufacturers a chance to catch up.

The treasury secretary believes that “the basic imperative should be to emphasise growth now,” but the United States aren’t seeing any. In spite of a record deficit well over a trillion dollars, unemployment rates in the United States have hovered stably around 10 percent for many months while budget outlooks become evermore dire.

Yesterday, the International Monetary Fund predicted that the world economy will expand 4.8 percent this year while the United States are likely to linger at 2.6 percent — historically weak coming after a recession. The Fund actually recommended the United States to boost exports to make up for its huge trade and budget deficits.