Trend of the economy; Why Europe wants US deficits cut
European leaders are renewing their pleas that the US government take steps to reduce Washington's huge budget deficits, which threaten to reignite American interest rates.Skip to next paragraph
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European governments run budget deficits, too; in some cases larger than those of the United States in relation to the size of their respective budgets.
But runaway US deficits, allied officials contend, directly hamper European efforts to put their peoples back to work, at a time when jobless rates across the Atlantic are climbing.
''Our economic problems,'' said a European official to a prominent American official, ''are worse than yours and Reagan's policies do not help.''
Treasury Secretary Donald T. Regan heard the same message when he met in Paris a few days ago with finance ministers of Britain, France, West Germany, and Japan.
Reportedly, the Europeans and Japanese, dispairing of nudging the Reagan administration out of its tight money policy, have agreed to stimulate their economies on their own by lowering interest rates. This effort, however, runs the risk of a renewed flight of capital to the United States, if American interest rates soar above European levels.
Huge budget shortfalls, American experts agree, will put upward pressure on interest rates in the United States - unless President Reagan and Congress are able to whittle down the deficits. The problem is that big deficits send the US government into the financial marketplace to compete with private borrowers for the funds available, thus driving up interest rates.
Remedies being discussed include higher taxes or more spending cuts, or a combination of both. Europeans leave the mix up to the United States, but they want action.
High US interest rates buoy the strength of the dollar, thereby attracting foreign capital into dollar investments to earn the best returns. This forces European central banks to boost their own interest rates, to curb the capital outflow.
High interest rates in Europe have the same effect as in the United States - they stifle borrowing, investment, and the creation of jobs.
Unemployment among young people especially troubles European leaders. The postwar baby boom, which came to Europe several years later than in the US, is pouring more young people onto the job market than depressed European economies can absorb.
Traditional old-line European industries - steel, autos, and textiles - are looking to decrease their labor forces, not increase them.
All this contributes to European reluctance to follow the United States down the road of stiff economic sanctions against the Soviet Union and Poland.
''We need every job we can get,'' said a European businessman, ''and trade with the East provides a lot of jobs.''
Europeans contend that US sanctions announced by President Reagan hurt some firms in Europe by preventing them from exporting goods to the Soviet Union and Poland that contain American technology.
On the other side of the Iron Curtain, meanwhile, evidence grows that the burden of helping Poland economically is putting greater strains on the Soviet economy than Moscow admits.
Among the signs, cited by authoritative American and European sources:
* The Soviets, according to Swiss and US experts, have reduced their foreign exchange deposits in Western banks from $8.5 billion at the end of 1980 to less than $3 billion now.
* Moscow, sources say, has been forced to cut oil deliveries to some Eastern European allies by 10 percent, partly to keep up hard currency petroleum sales to the West.
* Soviet gold sales are far above normal, as Moscow seeks to acquire enough foreign exchange sufficient to meet its own needs and those of Poland.
Russian sales of the precious metal have helped to drive gold prices well below the $400-an-ounce mark, something which Moscow has tried in the past to avoid. The Soviets, it is widely believed, are helping the Poles meet interest payments on their enormous hard-currency debts to Western banks.
In addition, the Soviets have pledged more than $3 billion worth of new credits to Poland, plus continued supplies of food, energy supplies, and other raw materials.
Despite strains on the Soviet economy, Kremlin leaders evidently prefer to keep Poland afloat rather than allow Warsaw to default on its Western debts.
Such a default - the first ever by a communist European regime - would boomerang against all communist states in Eastern Europe.