Why is America Doing Better Than the Euro Zone?

There isn’t a more exasperating question. Why is the economy of the Euro Zone going to register a decline twice the size of that of the United States in 2009? It’s the OECD, the Organization for Economic Co-operation and Development, that says as much in its latest predictions, which were published on Wednesday. The Gross Domestic Product (GDP) decreased more than 4.8 percent in countries that use the euro as currency, compared to only 2.8 percent across the Atlantic. Even though the European economy grew less in 2008, the stimulus movement will be less distinguished on the Old Continent in 2010 than in America. The crisis is showing itself to be more severe here.

Isn’t that unfair, as children say? Before experts of the OECD respond to what public opinion considers a paradox, recall the usual explanations. For several months already, Europeans have more or less understood that their fate would be worse than that of their American cousins.

We praise their legendary resilience to difficulties. We applaud the reactivity of the Fed and the Central Bank, and the tenacity of the Obama administration. The interest rate rolled back to zero, trillions of dollars were spent to support the banks, and aid was given to homeowners. Europeans admit their guilt, repeating the lament of old Goethe back in the 1820s. “America, your lot is better than ours here on the old continent. You are not distracted by useless memories.”

The response that the OECD provided is far less romantic, but very interesting. It contains four figures. First, its experts predict that “internal demand,” the combined demand of households and domestic businesses, will decrease by 3.5 percent in the U.S. in 2009. They predict it will be a little less in the Euro Zone, with a contraction of 3.1 percent. Here’s where it helps to put the impact of support plans in the U.S. and in Europe in perspective. Obama doesn’t stimulate more effectively than us. However, Americans stop themselves on the international front. The economists of the OECD assess that “clean exports,” withholding from importations, will soften the blow of the recession domestically by allowing the American economy to regain one growth point of GDP. For the Euro Zone, it’s the opposite. Foreign trade, around 1.7 percent of GDP, has a very negative effect, adding to the recession of 3.1 percent due to the contraction of internal demand. In 2009, internal demand fell 4.8 percent.

This data leaves one wondering why Europe is punished by international commerce while the United States finds it beneficial. The first reason is geography. More than half of the exchanges of the Euro Zone are with areas strongly affected by the recession, including the United States, United Kingdom, and developing countries in Eastern Europe. Meanwhile, American companies, which are relatively better off, trade principally with Asia. China and Latin America have held up better under the economic recession.

The second reason is of a monetary nature. The weakness of the dollar compared to the euro constitutes an easy commercial weapon, but does not pose a significant threat when inflation disappears from the landscape. No one seems to be bothered by it, including the OECD and the International Monetary Fund, the two multinational organizations who exercise a mastery of fact over international debate. It would seem that the currencies were a taboo subject at the G-20. The Chinese don’t want to hear of it.

The doctrine of the IMF is otherwise affirmed in this statement. The dollar must lower in comparison to other foreign currencies in the coming years.

This week, Olivier Blanchard, chief economist at the IMF, explained it at a conference in Paris organized by the Caisse des dépôts. He said that it’s the only way to satisfy America’s external deficit. The United States undoubtedly has to export because it can no longer rely on its own consumers, who are already in too much debt. Attempts to create balance are already underway as per the solutions suggested by the IMF, but clearly at the expense of European growth.