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US and European paths to recovery diverge

Ahead of the G-20 economic summit, a divide grows over the balance of regulation and stimulus.

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“Merkel and Sarkozy are serious about defining the EU position; they are saying the Franco-German engine is back,” says Eloi Laurent, an economist at Sciences Po in Paris.

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“The priority of the EU is to get the G-20 to work on financial regulation. It is a clear rebuttal to [US Treasury Secretary Timothy] Geithner and [White House economic adviser Larry] Summers.”

Brown, who is hosting the summit in London, has found himself standing between Europe and the US. In the European Parliament this week, Brown made one of the most pro-European speeches of his career, advocating regulation. Yet he is now embarking on a whirlwind world tour as a staunch advocate of stimulus. On Tuesday, he spoke to the European Parliament in France, while he visited New York Wednesday ahead of a trip to Brazil and Chile.

While the potential clash is framed in Europe as US stimulus vs. European regulation, the White House this week called this a false dichotomy.

“We are living through a time of global economic challenges that cannot be met by half measures or the isolated efforts of any nation,” Mr. Obama, advocating stimulus, wrote in an opinion article republished in dozens of world newspapers March 24. “If we continue to let financial institutions around the world act recklessly and irresponsibly, we will remain trapped in a cycle of bubble and bust,” Obama added, in a nod to the importance of regulation.

Germany, the economic powerhouse, is the only EU country with imminent elections. Merkel’s party is falling in the polls.

She must reassure German taxpayers that the economy they worked hard to keep stable will not be tasked with bailing out the world, and fund those states less responsible in their behavior.

“For the time being, the official view is that the EU is not in danger, the euro is fine, the IMF will bail out the East, and there is no need for institutional solutions,” says a senior German political economist who requested anonymity because of political sensitivities. “We have elections, and we don’t want to bail out others.”

Yet recent IMF figures suggest the European economy, including Germany, is in tougher straits that previously thought.

The crisis of banks in Austria, and the economies of Greece, Italy, and Spain have raised particular concern.

“Believe it or not, Europe is harder hit than the US,” says Mr. Laurent of Sciences Po.

He argues that Europe’s regulatory approach to the G-20 reflects a culture of discipline in Europe, when what is needed is a culture of cooperation to face the crisis: “The ’08 figures, and ’09/’10 projections show the EU will endure greater shock. Unemployment may be greater than Europe’s famed ‘automatic stabilizers’ are prepared for. Our automatic correction mechanisms were not built for a crisis this deep.”

John Kornbluh, a former senior US diplomat now with a Berlin law firm, says agreement is crucial coming out of the summit.

“I think the G-20 will end as a love fest, because that is what is needed,” he says. “But in Germany there’s a hope that the truth about the [economic] downturn won’t sink in before the election.”