April 22nd, 2012

Fareed’s Take: “Consider this – the U.S. economy is on track to grow between 2-3% this year.”

On the Sunday, April 22 edition of FAREED ZAKARIA GPS , Fareed Zakaria reflected upon the effects of austerity budgets upon economic growth for Europe’s economies.  He also compares the economic projections for several of Europe’s economies with those for the United States.  The text for this commentary is below – a link to the transcript for the full program follows:

FAREED ZAKARIA, CNN HOST, “FAREED ZAKARIA GPS”:     …first, here’s my take.  A new poll in the United States shows that Americans are still deeply frustrated at the slow pace of the economic recovery.  That’s understandable. Unemployment stays  stubbornly high.  But I was just in Europe, and they think America is booming.

Consider this: the U.S. economy is on track to grow between 2 and 3 percent this year.  In Europe, by contrast, half the eurozone economies are going to actually shrink this year and not one major European country will grow over 1 percent.

Last Thursday, Christine Lagarde, the head of the International Monetary Fund, and former French Finance Minister of France, said there were “dark clouds” hanging over the global recovery and that the eurozone was at the “epicenter of potential risk.”   Borrowing costs for countries like Spain, Italy and Greece are rising again.

What is going on? Didn’t it look like the Europeans had managed to avert a crisis only a few weeks ago?  Yes it did.  Mario Draghi, Europe’s new Central banker, had adopted a version of Ben Bernanke’s policies and injected money into the European financial system and economy.  But his efforts are now being undercut by the German Bundesbank, which reflects Germany’s obsession about inflation even at the cost of growth.

The larger failure, shared across Europe, has been too much austerity.  Consider that data we started with.  The U.S. economy, which received monetary and fiscal stimulus, will grow at well over 2 percent this year.

European economies that have followed the path of cutting spending and raising taxes to reduce deficits are finding themselves in a downward spiral: cutting spending means laying off people, which means less demand for goods and services, which means the economy shrinks, which, ironically, means lower tax revenues and thus larger budget deficits.

Take a look at Britain.  Britain has followed a brave austerity plan, cutting government spending across the board and raising taxes.  The result, British growth has stalled.  The economy will grow barely 0.8 percent this year.  And while its budget deficit was predicted to be under $13 billion in February, it was in fact $24 billion for that month alone.

After its austerity program, Spain has hit 20 percent unemployment, 50 percent youth unemployment, and now has a much larger budget deficit than projected.  Europe needs structural reforms that will cut spending over the long term – by raising retirement ages and cutting benefits.  But it also needs pro-growth reforms that open up its labor market.

And, most importantly, for now, it needs to stop imposing austerity in a depressed economy and learn from something from the example across the Atlantic.  Two or 2.5 percent growth might not look so great in America, but it a lot better than negative 0.3 percent, which is the current estimate for the eurozone’s economic growth.

FAREED ZAKARIA GPS airs Sundays on CNN/U.S. at 10:00am and 1:00pm ET, and at 8:00am and 3:00pm ET on CNN International.  The full transcript of this program may be found here.