Last summer, things looked bad on both sides of the Atlantic. There were fears of double-dip recessions, and stubbornly high unemployment rates. Stock markets swooned. Now, the pictures appear very different.
The unemployment rate in the US has been steadily falling, while the unemployment rate in the euro zone has climbed to its highest level since the currency was introduced more than a decade ago. There is still some double-dip talk in the US, but in many European countries it is a reality.
In the US, the Institute for Supply Management said this week that its survey of manufacturers showed continued improvement. As a group, companies say that overall business is better and that new orders are doing very well. They say they expect to continue adding workers. In the euro zone, a similar purchasing managers survey indicated that conditions were deteriorating.
In Europe this week, a meeting of finance ministers trying to negotiate details of how banks will be forced to raise capital ? and whether some countries can require their banks to have more capital ? produced no agreement but provided more reasons to doubt whether the banks are safe. In the US, the Federal Reserve?s quarterly survey of lending officers indicated that lending conditions were improving. No one factor made the difference in the divergent paths the two continents have taken. But there are two ? both related to financial conditions ? that were very important. In each case, it appears that the US did a much better job.
The first one concerns the banks. The huge bailouts, started in the administration of George W Bush and continued by President Obama, worked. The banks were bailed out, and the survivors were forced to recapitalise. The bailouts have become generally unpopular, in no small part because many banks seem to still view themselves as masters of the universe. There is nothing more grating than an ungrateful welfare recipient riding around in a chauffeured Mercedes complaining that he is not being treated fairly. But the reality then ? and now ? was that a modern economy must have a decently functioning financial system.
There is a fundamental dispute when it comes to setting bank capital standards. Requirements for high capital are often seen as discouraging lending, thus damaging an already weak economy. Too many regulators in Europe accepted that argument and delayed efforts to force banks to raise more capital. Unfortunately, whatever window of opportunity was there for them to raise capital at anything like acceptable cost has vanished with the spread of the sovereign debt crisis. It turns out that forcing banks to raise capital can be critically important. If they turn out to need that capital, and don?t have it, then lending will dry up.
The other area where American policy seems to have worked better is monetary policy. The Federal Reserve?s purchase of large amounts of securities ? known to some as quantitative easing ? was critical in restoring liquidity to American banks and making it possible for them to continue lending. The ECB avoided disaster with its own programme to pump cash into banks. It has bought time, but fundamental problems remain.
Of course a new crisis could reveal American banks are still undercapitalised, but they certainly are in better shape than they were. And a severe European downturn conceivably could stop the American recovery in its tracks. But as of now, there can be little doubt that the American government handled the problems of the last year far better than did its European counterparts.