Joan Muysken: “Europe is a difficult economic partner for the US to debate with”

How important is the outcome of the US elections for Europe and can a strong US President help Europe solve its problems? “That’s not the way to look at it,” says Prof. Joan Muysken in an interview with Talkin’Business.

 

Will the outcome of the US elections have an impact on the European economy?

To be honest, I’m not sure if the outcome of the US elections, whether Barack Obama or Mitt Romney wins, will be very important for Europe or the world economy. What the US will do as a country, however, can have a very important impact for the world economy because it’s a huge economy. To what extent the President of such a country really can influence things, is question for debate.

The global imbalances are a very big concern for the world economy, especially the imbalance between China on the one hand and the US on the other hand. Europe is not the most central element in this debate.

Romney has suggested that he will take a tougher stance on China if he is elected, without further specifying what he has in mind. In the meantime, China is already adapting its economy and the US, with Ben Bernanke, is also already doing a lot of things, irrespective of who is the President.

Will the euro crisis affect the US?

The difference between the US and Europe is that the US has an economic policy whereas Europe does not. The European Central Bank has a monetary policy but no fiscal policy.

Europe is not a very fruitful concept to debate with because Europe is not one single player. One can debate with Angela Merkel or François Hollande or David Cameron but not with Europe as a whole. Europe cannot be held accountable.

That is a complicating factor that makes it more difficult to speak in the same terms about Europe as we do about the US.

How does the financial crisis affect a country such as the Netherlands?

The Netherlands is a very open economy, much more than other European countries. As such, it is immensely dependent on world trade and on the outcome of the global imbalances narrative.

More than 50 percent of the Dutch GDP goes abroad, which means that if something happens abroad, the Dutch GDP is immediately affected.

Part of the Dutch foreign trade also takes place within Europe. That is something the Netherlands needs to take into account when certain voices start suggesting to split the euro zone. Such a move would have strong repercussions on trade between European countries and a big detrimental effect on economic growth in Europe.

Can a strong US president help solve Europe’s problems?

This is not the way to look at it. Europe should have a strong enough leader to sort out its own problems.

What is the main domestic challenge facing the new US President?

The enormous divide of opinions one can observe between the two camps in the US elections is a serious cause for concern. Whether one camp wins or the other, victory will come with a very small margin. This shows how strongly US society is divided. And it also shows that the divide will stay.

Similar tendencies, although to a lesser extent, are starting to come up in Europe and we should be very careful not to go further along that road. We need to prevent the emerging divisions induced by the austerity measures from becoming bigger, not only within countries but between countries.

In the Netherlands, the two largest parties who opposed each other both obtained almost the same amount of seats. The same phenomenon can be observed elsewhere in Europe. Angela Merkel’s political agenda is in the middle of the road but her margin is shrinking.

Action against the Economic Governance Package during Plenary session in Brussels
(Photo by Olivier Hansen, some rights reserved)

Who will contain the US budget deficit?

Contrary to popular belief, history tells us consistently that Republican Presidents create much larger deficits than Democratic Presidents.

Clinton left office with a surplus in the budget. Bush came in and started to lower taxes on the one hand and launched a war in Iraq on the other and was surprised to see a big budget deficit. Reagan embarked on the Star Wars project, among others, which also meant huge amounts of government spending.

The natural instinct of Republican Presidents is to lower taxes and Romney might also want to do that if he is elected but he will also have to cut expenditures because the US deficit is already very large.

What is your advice for the next US President?

I would not be surprised, should Romney come to power, that social differences in the US would become more pronounced, leading to turmoil and unrest.

I don’t know how these social tensions will affect the world but I’m not optimistic about it. My natural inclination is to say that the next President will have to manage these tensions and create bridges between the various sections of society but then again, one should not overestimate the President’s capability to do so.

In my opinion, both Romney and Obama should be very concerned about doing something about the growing social tensions in the US because such a deep divide in such a big country may spill over to other countries.

 

Joan Muysken is Professor of Economics at the Faculty of Economics and Business Administration, Maastricht University, where he teaches macroeconomics and labour economics. He obtained his PhD from the University of Groningen on the aggregation of production functions. He was a Visiting Researcher at the University of Oslo in 1980 (January-March) and in 1983 (January-August) he stayed at the SUNY Buffalo (USA) as an Assistant Professor. He was a Visiting Professor at the Catholic University of Louvain (Belgium) from January-July 1989; at the University of Newcastle, Australia (November-December 1995 and March-April 2000); at the ZEW, Mannheim during March 2000; and at the WZB, Berlin during May 2000. Joan Muysken’s research interests include endogenous growth and diffusion of technologies, skill mismatch, job competition, analysis of unemployment.

 

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