subject: The Forecast For The Next Year Is Rosy For America But Cloudy For European Union [print this page] The forecast made by the CEO of PIMCO, Mohammed El-Erian is rosy for America but Cloudy for the European Union. Underlying this analysis is the time-honored differences between the two continents on either side of the Atlantic.
Europe has not been keen on the stimulus policy followed by America from the beginning of the onset of the crisis. Neither of the two political parties has rejected the stimulus angle - it is just that the emphasis is different.
Europe is reluctant to stimulate the sagging economy perhaps because of lack of cultural unity among its member countries. Germany is fiscally restrained but it does not wish to help out the profligate (in their view) Mediterranean countries. Tax cutting in the manner of USA has never gained popularity in Europe. Here the political parties are not in disfavour of what the Americans would term "big government".
However American solidarity is being tested by two vital factors - persisting high unemployment and huge federal deficit. Already rumblings can be heard. Texans are rejecting the plan of bailing out the Californians - should that situation arise.
Couched in the predictions of El-Erian is his leaning towards more austerity. He would like the government to undertake policies that would reduce commitments in the budget while simultaneously giving a fillip to growth.
El-Erian had also opined that America now needs "a more meaningful push to improve America's long-term competitiveness, which has been compromised by our lagging behind in infrastructure improvements and education, as well as resource misallocations". Similar views are held by Bill Gross his colleague in PIMCO. Gross wants going back to competitiveness.
The remarks of El-Erian would satisfy many streams of economic thinking - cutting the budget (European as well as GOP line) and spending (Democrats) so long as it props up the competitiveness of USA. Another suggestion is avoiding "resource misallocations". This means the right to make decisions should go back to the private sector and not be dominated by the government policy makers. The Republicans are keen on this angle for leading to growth. The understanding reached at over the tax cuts was one such move.
Only time will tell whether the step has been prudent or not; if bond-fund-managers similar to El-Erian and Gross have been right or wrong.
