European Central Bank Advocates Tightening as U.S. Urges Domestic Demand Growth

Bloomberg:

 European Central Bank President Jean- Claude Trichet and Treasury Secretary Timothy F. Geithner diverged on prescriptions to sustain growth, with Europe set to tighten budgets and the U.S. seeking stronger domestic demand.

The impact of narrower budget gaps “on growth could not be considered negative because it would improve confidence,” Trichet told reporters yesterday after meeting with Group of 20 finance chiefs in Busan, South Korea. The need for such action is clear in “old industrialized economies,” he said.

The remarks underline determination within the 16-nation euro area to shrink budget deficits in the wake of a sovereign debt crisis that has led to a 750 billion-euro ($913 billion) rescue fund for the region’s weakest members. The emphasis contrasts with the message delivered to the G-20 by the U.S., which wants countries with trade surpluses, including China and Germany, to stoke demand to help sustain the global recovery.

“Stronger domestic demand growth in Japan and in the European surplus countries” is needed, Geithner said at a separate press briefing in Busan. Spending in both areas is “relatively weak,” he said.

Fiscal Horizon

While Geithner echoed the view that fiscal consolidation is needed, he said it should be done over the “medium term.” European officials said yesterday that budget tightening needs to come next year, and German Chancellor Angela Merkel said that growth can’t come at the price of high state budget deficits.

International Monetary Fund estimates backed up Geithner’s concern. Managing Director Dominique Strauss-Kahn said at a press briefing that efforts to cut budget deficits in rich countries could hurt growth over the next two years. Stimulus measures implemented in the last two years that haven’t expired yet should remain in place in advanced economies, he said.

A study by the fund showed that fiscal consolidation, without market deregulations that would bolster domestic demand, could shave as much as 2.5 percentage points off global growth and cost 30 million jobs worldwide.

“The world may end up in a period of sub-potential growth for two or three years,” Venkatraman Anantha-Nageswaran, who helps manage about $140 billion in assets as global chief investment officer at Bank Julius Baer & Co. in Singapore, said in an interview yesterday. “Asia is too small to support export-led growth for both euro zone and the U.S.”

Posted via email from Jim Nichols