The Europe Effect on the U.S. Economy: The balance between radical free markets and widespread government

by Michael DISABATO

There is a significant debate going on in America regarding the future of free market capitalism. The recession is starting to cause the American system of free market capitalism to look unreliable.

Why, many EU countries argue, should the free market system be the “golden boy” when it frequently generates recessions. They argue that America has damaged the global market place with its faulty loans and unregulated systems. It seems to be a more valid argument as the days progress and the recession sinks its teeth deeper into the global economy.

So what is the best role of the government in the marketplace? The short answer is there is no answer. With efficient government regulation growth will stagnate, but with little regulation growth will be subjected to violent swings.

Is anyone to say that the standard of living in America is any better than that of the European Union? If anything, it is painfully obvious that Americans have been living on top of a posh mountain. And the biggest opponents of bigger government are the ones that run for help when the trouble is in sight. For example, GM.

Before we continue, the thought is not that the American government will be as socialist driven as the EU government. It is more so the idea that in the future spending will have to take place. As Joe Meacham and Evan Thomas lamented to in Newsweek, there is an undeniable fact that “in the short run, since neither consumers nor business is likely to do it, the government will have to stimulate the economy. And in the long run, an aging population and global warming and higher energy costs will demand more government taxing and spending.”

President Obama should try and find a central balance that will promote innovation and competition, by adapting some of the European rules that can help protect investors and lenders and keeping the American style of innovation. Because too much regulation can be as damaging in the long run as no regulation at all.

For example, Brazil is currently weathering this economic storm with impressive stability. However, their government is compelled to keep taxes at very high levels to fund its colossal spending, which is at 37 percent of GDP. This will not allow the competition and innovation needed to promote long-term growth. If things do not soon change, they will see themselves fall into the kind of stagflation that has plagued Japan for many years.

In China, banks are not making enough loans because of heavy restraints that are put on by the government. Their interest rates are extremely high because the government prevents the banks from re-lending their deposits. Re-lending is the banks main source of income, and without this there is little chance they will be willing to hand out the kind of loans that promote heavy growth. China will soon be judged on their ability to change from an export-dominated country into an import-dominated country.

However, it seems that the EU and America are the same in the fact that they cannot escape the enormity of this crisis. While the American financial system has caused the crisis to start, it seems the European system will prove to worsen it. Niels C. Jensen wrote an edition of “Outside the Box” which states if “EU Commission’s estimate of £16.3 trillion of impaired assets is correct, then the crisis is far worse than any of us could ever imagine. Not only would we have to get used to the prospects of a systemic meltdown of our banking system, but entire nations may go down as well.” This makes the distinction of the correct system even harder to make. Italy banks may start to be pulled under by the weight of failing eastern European banks, and many other western European countries may follow.

It is obvious that the current system in America is not the best way to go. The government must look at different ideals and strategies in order to pull America out of the recession and try to rebalance the government for the future. Sunder Katwala, head of Britain’s center-left Fabian Society, stated the obviousness of “centrist rebalancing” in America. However, it is up to the Obama administration and the rest of the world to try and figure out which system is best suited to weather the storm.