U.S. Treasury Secretary John Snow suggested on Sunday that Europe should cut interest rates to revive the continent’s sluggish economies, but aides said later he had not intended to interfere in European policy making.
In a speech to the International Institute of Finance on the sidelines of the International Monetary Fund annual meeting, Snow was blunt in his assessment of Europe’s shortcomings.
“Governments need to take actions ... to knock out blockages to faster growth,” Snow said, “We also need, in the case of Europe, more accommodative monetary and fiscal policy.”
But Treasury spokesman Rob Nichols quickly said Snow had not intended to say Europe needed to cut rates but was simply “encouraging everybody to take steps to grow.”
“Snow was not calling for a change in monetary policy. He was simply underscoring the broad idea that you need good monetary, fiscal and regulatory policies to grow,” he said.
Canadian Finance Minister John Manley no qualms about giving Europe advice, saying its performance continued to “languish.”
“In our view, further monetary easing should be considered to reinforce growth prospects,” Manley said in an address to a meeting of the IMF’s policy-making committee.
The European Central Bank cut its main lending rate to 2.0 percent in June and most economists expect it to stay on hold at this record low rate for some months to come.
Euro zone members are meanwhile constrained from expanding fiscal policy by strict rules that cap their deficits at three percent of gross domestic product — a limit France and Germany have already broken due to slowing growth, risking hefty fines.
Limited room for manoeuvre
Sensitive to suggestions they are not doing enough to revive growth, European policymakers have criticized swelling U.S. trade and budget deficits, warning they are unsustainable. Snow appeared to be returning fire at the Europeans.
The U.S. Treasury chief noted that not only the pace of growth, but also expansion of personal incomes was trailing in Europe and much of the rest of the wealthy nations represented by the Group of Seven — the United States, Britain, Canada, France, Germany, Italy and Japan.
“They are lagging in Japan, in Europe, France, Germany, Italy and the European Union generally,” said Snow, who met his G7 counterparts in Dubai on Saturday. “This is troublesome.”
The administration of U.S. President George W. Bush has implemented deep tax cuts and has frequently aimed broadsides at other governments for not following its example of stimulus.
The U.S. budget deficit has soared to record heights above five percent of annual national output but Snow said it will be cut in half within four or five years as a reduced tax burden spurs more economic activity.
But from Europe’s perspective, the fact that the U.S. economy was growing faster than theirs was not a persuasive argument for junking the Stability and Growth Pact which sets rules for euro members such as the deficit cap.
Spanish Economic Minister Rodrigo Rato said Europe should not assume deficit spending automatically produced more vigorous expansion simply because U.S. growth was outpacing theirs.
“Europe shouldn’t get it wrong,” he said. “Hoping bigger public deficits will help European economic growth ignores the risks of higher interest rates and very quickly higher taxes, and secondly it’s not producing growth,” he said.
Speaking on the sidelines of the IMF meeting, Rato said European governments needed to concentrate on other measures to make their economies more competitive, not simply tax-cutting.
“All of us, and some more than others, are proposing reforms of labor markets, taxes and markets in general, but they have not delivered so far,” Rato said.
At their talks on Saturday, G7 finance ministers agreed on a statement that said all had a role to play to boost growth.