Would Romney be better for Europe?
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.
PHOTO: Republican presidential nominee Mitt Romney talks to former Florida Governor Jeb Bush (not pictured) in a hold room at the airport in Jacksonville, Florida October 31, 2012. REUTERS/Brian Snyder