Even high-quality medicine, if administered in excessive doses, can be harmful or, if used permanently, cause unhealthy addiction. That's why I have been repeatedly calling on countries, within as well as outside the EU, to be prudent. I used the rather hyperbolic simile of the “road to hell” in my speech to the European Parliament last week to warn against the danger of temporary measures - such as excessively increasing public borrowing, nationalising or subsidising banks and industries, putting up protectionist barriers or enforcing “buy American” clauses - becoming permanent. It was in this context that I referred to the adverse experience of protectionism and state intervention in the US in the 1930s ... I do not need to explain that the welfare states of Europe act as “automatic stabilisers”, sustaining consumer spending even in a slump. This means that Europe does not need such a large fiscal stimulus compared with the US, which does not have such a system of social support. I also believe that as the President of the European Council I do not need to explain that the situation in the EU is different from that in the US in a further way - the EU cannot choose to apply a wide-scale financial stimulus. Even though the Czech Republic is not a member of the eurozone, I do not need to explain the vital importance of the rules of the Stability and Growth Pact that restrict the size of a country's budget deficit and national debt. Or do I?
While I am not in favor of using trade protection to bolster U.S. net exports (something about the prospect beggar thy neighbor retaliation), Smoot Hartley was not the cause of the Great Depression. Nor was the New Deal. As far as a potential defense of the Buy American provisions that Topolánek criticizes, let’s turn the microphone over to Paul Krugman:
And one part of the problem facing the world is that there are major policy externalities. My fiscal stimulus helps your economy, by increasing your exports — but you don’t share in my addition to government debt. As I explained a while back, this means that the bang per buck on stimulus for any one country is less than it is for the world as a whole. And this in turn means that if macro policy isn’t coordinated internationally — and it isn’t — we’ll tend to end up with too little fiscal stimulus, everywhere.
Topolánek now advocates the lack of fiscal stimulus that worried Paul. If the European economy were currently facing excess aggregate demand, this call to adhere to the Stability and Growth Pact would make sense. Otherwise, it is the kind of Hoover economics that Republicans in Washington are also advocating.
Update: Paul Krugman has more:
Like many other economists, I’ve been revisiting the Great Depression, looking for lessons that might help us avoid a repeat performance. And one thing that stands out from the history of the early 1930s is the extent to which the world’s response to crisis was crippled by the inability of the world’s major economies to cooperate. The details of our current crisis are very different, but the need for cooperation is no less. President Obama got it exactly right last week when he declared: “All of us are going to have to take steps in order to lift the economy. We don’t want a situation in which some countries are making extraordinary efforts and other countries aren’t.” Yet that is exactly the situation we’re in. I don’t believe that even America’s economic efforts are adequate, but they’re far more than most other wealthy countries have been willing to undertake. And by rights this week’s G-20 summit ought to be an occasion for Mr. Obama to chide and chivy European leaders, in particular, into pulling their weight. But these days foreign leaders are in no mood to be lectured by American officials, even when — as in this case — the Americans are right.
Ian Traynor reports that the European leaders are likely not going to listen to President Obama:
The case pushed by Merkel repeatedly in recent weeks, and echoed by France and the European commission, is that there is no point now in more tax cuts and deficit spending to boost demand since it is not yet clear whether the huge fiscal stimuli packages already launched are actually going to work … the European leaders are indeed worried that Obama's huge public spending programmes could fuel hyper-inflation and leave Europe struggling to refinance colossal levels of state debt if they followed suit.