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The New Economy

Is US a model for austerity-wary Europe?

Despite its sluggishness, the US economy is growing while Europe's is contracting. A rising number of policymakers blame Europe's austerity moves.

By Business editor / May 5, 2012

A man walks past official campaign posters for Socialist Party candidate Francois Hollande (L) and French President and UMP political party candidate Nicolas Sarkozy (R) which are displayed on electoral panels in Tulle, France, May 5, 2012. France goes to the polls on Sunday for the second round of their presidential election, which in some ways is a referendum on the austerity measures that Europe has begun to take.

Regis Duvignau/Reuters

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America's poor jobs report has rattled world markets. Germany's DAX index fell 2 percent Friday. Wall Street saw its worst week of the year, as slowing job growth stoked fears that recovery in the United States is faltering. Last month, the economy added only 115,000 jobs.

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But the more telling number is 169,000. That's the number of jobs lost in the euro zone in March. For all its sluggishness, the US economy is still growing and its unemployment rate is down to 8.1 percent. The euro zone appears to be contracting and its unemployment rate has risen to 10.9 percent, a 15-year high.

There are myriad structural reasons for this dichotomy. But the distinction getting the most attention these days is a policy difference: America has chosen growth. Europe has chosen austerity. And it looks like the Europeans are losing the argument.

 Everyone recognizes that austerity is hard. But what if it's wrong, too? This is boosting calls for more growth-oriented policies – on both sides of the Atlantic – which is having important political repercussions.

On Sunday, millions of voters in France and Greece go to the polls and are likely to throw out the leaders who have backed austerity and spending cuts. In France, Socialist Francois Hollande is expected to win the presidency and has pledged to renegotiate the austere European Union treaty that would cap national deficit and debt levels. In Greece, both major parties are so discredited by the cuts that they have begun to initiate that it's not clear that they can win a majority of parliament even in coalition.

In the Netherlands, which is in far better economic shape than Greece, the government collapsed over the debate about austerity. Even German Chancellor Angela Merkel, who has been the face of German insistence on budget cutting and spending reform, is beginning to talk about the need for growth as part of those reforms.

That growth-vs.-austerity debate is also moving to the forefront in the US. It was behind the brinksmanship over raising the federal debt ceiling last year. It is a prime mover in the various congressional attempts at tax reform. It could crystallize this fall in the election, depending on how closely presumed GOP presidential nominee Mitt Romney ties himself to GOP budget-cutters in the US House.

So far, austerity has not fallen into disrepute in the US the way it has in Europe (perhaps because Americans have not felt its bite). An ABC News/Washington Post poll last month found that support for the tea party movement has slipped somewhat since last September but remains at a still-high 41 percent. The fate of tea party candidates in the US House in this fall's elections will be an important bellwether. After the election, a lame duck Congress must decide what to do about several tax and budget cuts that expire at the end of the year, which represent some $500 billion in federal stimulus.

If they decide to withdraw that stimulus, US growth will slow.

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