Bloomberg
November 25, 2011
The crisis gripping Europe reflects a much larger problem: The world’s policy makers have fundamentally opposing views of how to manage their currencies and economies. Unfortunately, there’s no happy solution.
Let’s examine the ideologies. In the U.S., the dominant crisis narrative is that authorities faced a once-in-a-hundred- years storm in the financial panic of 2008. The only proper response, then, was for the Federal Reserve to provide unlimited funds until confidence returned and longer-term solutions were possible. Many Americans apply this lens to Europe, and conclude that the European Central Bank must similarly print money to solve its crisis now.
Germans, together with many emerging-market policy makers, see a very different narrative. To them, the crisis is the result of governments repeatedly building up debts in response to economic slowdowns -- the same explanation U.S. authorities offered for emerging-market crises in the late 1990s. They might further note that the U.S. hasn’t used the time bought with the Fed’s largess to address underlying problems, such as the sorry state of public finances.
These poles reflect deeply held beliefs, not intellectual or moral failures, as those on opposite sides of the divide appear to think. There’s no objective truth. Nobody really knows how much debt the U.S. and the euro area, which issue the world’s two leading reserve currencies, can bear. It’s also unclear how much inflation the citizens of advanced nations will tolerate before they lose faith in their currencies. As the U.S. and Europe test new limits, we may soon find out.
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