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The Buck Stops Over There

Blaming Europe for the U.S. economy.

Jun 25, 2012, Vol. 17, No. 39 • By IRWIN M. STELZER
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So much for where we are. Now for where we are going. Economists are uncertain, but the consensus seems to be that such growth as our economy will chalk up between now and the election will be insufficient to create enough jobs to make his stimulus program a talking point for the president and his supporters, especially if the recent slowdown in consumer buying persists. No surprise, says the White House: The European contagion has hit our shores. Why, just look at the devastating effect of Europe’s unfolding recession on our exports. Well, let’s look.

While exports have been contributing to our recovery, we remain a nation not highly dependent on peddling stuff to foreigners. To the extent that we do, our leading customers are Canada and Mexico, not widely considered European countries. Last year, total exports accounted for a bit less than 14 percent of our GDP, 22 percent of which went to the EU​—​or 3.1 percent of GDP. Last month, the month of the miserable jobs report that the president wants to pin on the EU, our exports to that troubled area dropped by some 11 percent, or 0.3 percent of our GDP. If anyone outside of the White House believes that such a trivial drop in shipments to Europe caused job creation here to slow, he has yet to emerge. 

Indeed, the mechanism by which Europe’s troubles will reach our shores is, to put it mildly, unclear. Our mutual funds have greatly reduced their exposure to Europe’s banks, and our own banks are in far better shape and less linked to their European counterparts than ever. In fact, it can be argued that Europe’s difficulties have made America more of a safe haven for flight capital, thereby helping to keep both interest rates and inflation here low as the strong dollar puts downward pressure on commodity prices.

There is one contagion mechanism that might, only might, fit the president’s narrative as he attempts to divert attention from his failed policies by pinning blame on Europe​—​and most especially on Frau Merkel, who continues to link aid to her less fortunate eurozone colleagues to their willingness to rein in their trade unions, reform their labor markets, and take an ax to their public sector payrolls. Wall Streeters, or some of them, contend that a worsening of the situation in Europe, especially a Grexit​—​Greek exit from the eurozone​—​will rattle stock markets here, cause a flight from shares, and hit investors in their pocketbooks, with knock-on effects on consumer spending and business investments. But as the estimable Bret Stephens pointed out last week in the Wall Street Journal, previous overseas financial upheavals have had no such effects on the U.S. economy. Do not confuse the instantaneous response of the stock market with a fundamental change in the economy. After the 1997 collapse of Asian currencies, the Dow plunged, but the economy did not, growing at better than 4 percent, a feat it repeated after the Russian ruble crisis. “Bear this not-so-ancient history in mind,” writes Stephens, “as the Excuse-Maker-in-Chief cites another imploding region to explain 1.9 percent growth and 8.2 percent unemployment.” 

None of this is to deny that some U.S. companies will find life a bit less pleasant should the European recession deepen and lengthen. They will: Starbucks is already seeing a slight drop in sales in Europe. Nor should we be as confident that we will escape any fallout from a European financial upset and its ripple effects as the president is that we will be hit hard by such an event. If we learned anything from the aftermath of the demise of Lehman Brothers it is that we should not be overly confident in our ability to understand all of the interconnections in global financial markets. So it is not inappropriate to worry. But neither is it appropriate to excuse the president’s inability to cope with our economy’s weakness by a serial hunt for some outside force on which to place the blame. Or the Republicans’ willingness to make it easy for the president to avoid a grand compromise on fiscal policy by elevating a desire for lower taxes on high earners to the sole, or at least the primary goal of economic policy. 

In the end the course of the American economy will be determined not in Berlin, but in the voting booths of America, where voters face a choice, not an echo​—​a choice between a candidate who believes, really believes, that America’s future prosperity depends on an expansion of the public sector, and one who seems more likely to see our salvation in unleashing the private sector by reducing regulations and reforming the tax system. So far, Europe’s voters have been denied a voice in their economic future by a eurocracy skilled at avoiding the ballot box. We are luckier here in America.

Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).

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