Public spending cuts and tax increases should be imposed immediately across the industrialised world as evidence of a healthy European recovery mounts, according to Jean-Claude Trichet, president of the European Central Bank.
In a strident article for the Financial Times, Mr Trichet argues that policymakers who want to prolong the stimulus are mistaken and that cutting borrowing would have “very limited” effects on growth.
The view from Europe’s senior economic policymaker contrasts with continued US demands for fiscal tightening to be delayed at least until 2011 and suggests there is still little agreement over the best way to foster a strong global recovery from the financial and economic crisis of the past two years.
“We have to avoid an asymmetry between bold, if justified, loosening and unduly hesitant retrenchment,” Mr Trichet says in his article.
Firing a shot at the US administration and the International Monetary Fund, Mr Trichet criticises last year’s global push for budgetary stimulus.
“With the benefit of hindsight, we see how unfortunate was the oversimplified message of fiscal stimulus given to all industrial economies under the motto: ‘stimulate’, ‘activate’, ‘spend’.”
The US view in favour of continued short-term stimulus was repeated by Ben Bernanke, chairman of the Federal Reserve, on Thursday. Giving evidence to Congress, Mr Bernanke supported fiscal efforts to boost demand before the US embarked on a “well-controlled” longer-term deficit reduction plan.
“In the short-term I would believe that we should maintain a reasonable degree of fiscal support, stimulus for the economy,” Mr Bernanke said.
After his remarks on Wednesday that US prospects were “unusually uncertain”, Mr Bernanke elaborated to US lawmakers yesterday on the further actions the Fed might take to boost the economy if growth disappoints. Mr Bernanke made clear that the Fed is considering a range of options in case growth weakens and it needs to ease policy further.
The differences over the timing of budget cuts reflects in part the different fortunes of the economies on either side of the Atlantic. US data on Thursday were mixed, with existing home sales falling less than had been expected but initial jobless claims higher than forecast.
Although European growth was weak in the first quarter, more recent data have been surprisingly robust, suggesting the fallout from the Greek sovereign debt crisis will be more limited than feared.
Both manufacturing and services output in the eurozone grew significantly faster than expected in July, according to the latest purchasing managers’ indices, driven by a strong performance in both sectors in Germany and in the services industry in France. The eurozone index of consumer confidence was also at its highest level in July for more than two years, the European Commission said.