Old Europe is right on stimulus

Treasury Secretary Timothy Geithner headed to Europe yesterday to lobby for a "global stimulus" from the G-20 countries that are holding an economic summit two weeks hence. This follows White House economic czar Larry Summers's weekend call for a "global stimulus," which leaders in Europe roundly rejected Monday. They were right to do so, says the Wall Street Journal.

When the European Union (EU) established the euro in 1999, it put in place strict limits on deficit spending and debt-to-gross domestic product (GDP) ratios. Those limits have not been universally honoured within the currency bloc, but there's a reason they're there, says the Journal.

For decades, countries like Greece, Italy and Belgium had run up huge national debts trying to pay for social-welfare programs and keep their economies afloat at the same time. The chief result of these policies was a huge pile of IOUs, says the Journal:

In Italy, the national debt stood at 107 per cent of GDP in 1999.

In Belgium and Greece it was 104 per cent; Greece's fiscal house was so disordered that it was excluded from the first group of euro countries.

So from its founding, the euro zone insisted that countries not respond to every economic downturn by piling up debt. Budget deficits are supposed to be limited to 3 per cent of GDP, and total debt to 60 per cent of GDP. This has worked imperfectly, but debt ratios have for the most part come down or remained steady, says the Journal:

Italy's debt-to-GDP ratio is now 96 per cent.

Greece is at 105 per cent, while France and Germany have hovered around 50 per cent and 40 per cent, respectively.

U.S. debt stood at 36 per cent of GDP at the end of 2007 – before the financial panic and stimulus started piling it on.

The United States has run up $1 trillion in publicly held debt in the past six months alone – that's 7 per cent of GDP right there.

Source: Editorial, Old Europe Is Right on Stimulus, Wall Street Journal, March 12, 2009.

For text: http://online.wsj.com/article/SB123681403239101741.html

For more on Federal Spending & Budget Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=25

FMF Policy Bulletin/ 17 March 2009