By Anatole Kaletsky
NEW YORK, Nov 1 (Reuters) – Looking at the opinion polls,
there is no contest for which of the presidential candidates
would be better for Europe. In a survey published this week by
U.K.-based YouGov, 90 percent of European voters said they would
support Barack Obama over Mitt Romney. But does this lopsided
support correspond to the true interests of Europeans?
The numbers are not entirely surprising. The Republican
stance on emotive social issues such as abortion, healthcare and
environmental protection create an almost unbridgeable cultural
divide for many Europeans. On foreign policy, there are
understandable fears in Europe that a Romney administration
would downgrade the United Nations, increase the risks of war in
the Middle East, or possibly provoke confrontations with Russia
over Georgia or NATO enlargement.
However, if we focus on the issues that are preoccupying
Europeans now en masse – global economic stagnation and the
deepening euro crisis – then we reach a different conclusion.
Maybe Europe should root for Romney, despite his social views.
Romney’s election could help the European economy and the
euro for three reasons. The first is Romney’s tough Russia and
China rhetoric. This could allow European companies, which
already export two-and-a-half times as much as their U.S. rivals
to China and eight-and-a-half times as much to Russia, to become
even more dominant in these markets.
The second is Romney’s tax policy. Amid the many vague
economic promises from both candidates about creating jobs,
closing tax loopholes, balancing budgets and so on, only one
stands out for its specificity, and makes its implementation
after November 6 very likely: Romney’s commitment to cut income
and corporate tax rates by 20 percent. It may be, as Mr. Obama
has argued, that such huge tax cuts could not conceivably be
offset by savings in public spending or tightening loopholes.
But Romney has strongly suggested that he would cut taxes
anyway, relying on a Keynesian argument that any resulting
deficits would be temporary and would eventually close through
faster economic growth.
This policy would essentially repeat the 1980s experiment of
Reaganomics, perhaps with comparable results: an economic boom,
accompanied by big budget deficits that ultimately do no serious
harm. As I have noted before, Romney’s unequivocal promise of
tax cuts in the Denver debate seems to have been a major reason
for the jump in the polls in his favor.
President Ronald Reagan once quipped to a fiscal
conservative who warned of the dire budgetary effects of his tax
cuts: “The deficit is big enough to look after itself.”
If 1980s-style tax cuts stimulated the U.S. economy again,
economists could furiously debate whether the boom was due to
Keynesian stimulus or supply-side incentives. But whatever the
mechanism, a re-run of Reaganomics could transform the global
economic outlook and strongly boost the dollar, benefiting
exporters in Europe.
While European fiscal conservatives attacked Reagan for
debasing the U.S. currency with huge deficits, the dollar almost
doubled from DM1.90 to DM 3.30 between 1981 and 1985. Another
experiment with the deficit could produce similar, if more
muted, results.
A third, more abstract, reason why Europe could benefit from
a Romney victory assumes that Romney follows through on his
tax-cutting promises. He will then teach European leaders some
salutary lessons as they struggle with their own continent’s
economic and financial woes.
A Romney policy of boldly cutting taxes, if it proved
successful, might demonstrate once and for all that efforts to
narrow budget deficits in the midst of an economic slump are
unnecessary and self-defeating. In a slump, governments that are
fundamentally solvent can safely allow their deficits to expand
and their public debts to accumulate. Fiscal policy should not
aim to hit short-term deficit targets but should try to balance
revenues and spending in the long term. And such structural
consolidation should usually wait until after normal growth is
resumed and unemployment has returned to tolerable levels.
But such patient fiscal consolidation is only possible if
governments can rely on monetary support from their central
banks. If the U.S. economy achieves faster economic growth
following another round of tax cuts, this success will be
largely due to supportive monetary policies from the Fed.
Federal Reserve Chairman Ben Bernanke, instead of demanding
premature fiscal austerity, has been warning politicians against
cutting public spending excessively in 2013. More importantly,
he has promised to keep U.S. interest rates at zero until 2015,
effectively committing the Fed to finance whatever deficits the
government decides to run.
The European Central Bank, by contrast, has been demanding
ever tighter fiscal policies from European governments,
aggravating the recession, and it has threatened to withdraw
monetary support if governments miss deficit targets.
A successful Romney tax cut would thus emphasize the
contrasts between monetary and fiscal policies across the
Atlantic. It would also cast doubt on the strict division
between monetary and fiscal policy that was the core assumption
of the euro project – now it appears to be the chief design
flaw.
Any blending of fiscal and monetary policies is currently
anathema to the ECB and to the EU treaties. But U.S. experience
suggests that, to manage a continental economy successfully,
especially in a period of financial stress, the ECB will need to
require a broader mandate – and the strict separation between
fiscal and monetary policy in the EU treaties will have to be
revised.
A victory for Romney, if it resulted in big tax cuts and
fiscal stimulus, would force Europe to re-examine many of the
assumptions underlying the present fiscal and monetary austerity
programs that are taking place today.
The U.S. economy shows signs of accelerating next year even
without any extra tax cuts, so the economic difference between
an Obama and a Romney presidency may only be marginal. As Europe
sinks back into recession, it will look to the United States
with envy, regardless of which candidate wins.
