A soft crossroads

 

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Separate approaches to a global economic malaise in Europe and the United States have appeared to be headed toward a "soft crossroad" in recent weeks.

What's a soft crossroad? That would be the turning point, that critically decisive moment in which governments realize their hands are tied. There is no direction to go but forward, despite worries that previously established policies are getting the economy nowhere.

The first premise to establish here is the often-stated, seldom comfortable point that it takes time to turn trillion-dollar economies around. "These things take time," is a political chestnut that is often true. When European nations panicked and began passing austerity budgets this summer, you could hear the collective sigh of relief. But questions are lingering. Were the austerity budgets austere enough or too austere? Further, will European economies begin to expand with their economies in a rut and governments suddenly reversing course from spending to stingy?

After debt in Greece became the loudest headline in Europe this spring, Spain, Portugal, Britain and Ireland each took turns as poster children for too much debt. After that, austerity budgets became so chic even Germany and, reluctantly, France, got into the act, cutting spending to shore up confidence in the euro and convince investors that banks holding government bonds had solid foundations underneath them. The European Union and the International Monetary Fund then established loan programs, totaling more than $900 billion, designed to help countries that threatened to go into default.

So far, however, few have tapped into these funds and "The specter of default is still there for some countries. It has just been displaced until later on," SCCO International Chairman David Marshal said, The New York Times reported Thursday.

Whatever show of unity is expected in Europe, each country is facing its own political and financial realities. Credit rating agency Standard & Poor's, for example, dropped Ireland's sovereign rating this week from AA to AA minus amid worries that bailing out Irish banks is cost prohibitive. In Spain, which has the highest unemployment rate in Europe, austerity measures are being challenged by unions. Portugal and Spain are both facing political fights to see their austerity measures through. "Even though figures are likely to improve in the months ahead, the target announced in May, reducing the deficit to a ratio of 7.3 percent (of gross domestic product) is a long way off," a Commerzbank report said, referring to debt reduction efforts in Portugal.

In Washington, expectations of more stimulus spending have all but vanished, while the likelihood of serious austerity proposals -- well, it's an election year. Do the math.

On Friday, Federal Reserve Chairman Ben Bernanke is to speak at the annual Fed retreat amid a growing consensus that the economic recovery has lost its legs and the central bank has played its hand. Policy makers appear sharply divided with St. Louis Federal Bank President James Bullard expressing concern that an economy with its engines cut will fall into deflation and Kansas City Fed President Thomas Hoenig concerned that lending rates left at historically low levels will spur inflation.

This is hardly an academic argument but some feel it may as well be, given patience is among the most powerful, if unlikely, weapons left in the Fed's arsenal.

In international markets Friday, the Nikkei 225 index in Japan rose 0.95 percent and the Shanghai composite index in China added 0.28 percent. The Hang Seng index in Hong Kong fell 0.07 percent and the Sensex in India lost 1.25 percent.

In Australia, the S&P/ASX 200 rose 0.32 percent.

In midday trading in Europe, the FTSE 100 index in Britain gained 0.65 percent while the DAX 30 in Germany gained 0.32 percent. The CAC 40 in France added 0.71 percent and the pan-European DJ Stoxx 50 added 0.25 percent.