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As the US economy goes into recession, what should Europe do?

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  • Andreas Rees
  • Martin Hüfner

Abstract

The United States is in or on the brink of recession. What does this mean for European policy? How great are the risks for the European economy and what countermeasures should be implemented? Andreas Rees, UniCredit, Germany, sees the US economy as already in recession: "Many standard economic activity indicators point to an impending US recession, which probably has already set in." For this reason a laissez-faire economic-policy approach is not called for. Instead of sitting back and doing nothing, targeted, well-dosed measures are needed, bearing in mind that the world economy has become more independent of the US in recent years and German enterprises are relatively well-positioned. The real problem in Germany is not the enterprise sector but private consumers. Rees proposes three measures: firstly, a lowering of tax rates for low-income groups and an expansion of the tax-free allowance; secondly, a reduction or at least a prevention of further increasing pension and health insurance contributions; and thirdly a qualification offensive and more public investment in education. Martin Hüfner, HypoVereinsbank, sees negative structural effects particularly for the medium-term outlook of the US economy. The home-building sector will not return to its usual dynamics, also not next year. The same holds for consumers. For Europe, Hüfner sees only a minor danger: "In terms of its intrinsic dynamics, Europe is still in a good position. The upswing began here later. It has yet to develop its complete strength. Up to now only exports and investments have increased more strongly. Private consumption, which would put the recovery on a broader basis, has not yet 'ignited'. Here there is still something in the pipeline." If Europe only experiences a "dent" in economic activity in the second half-year, economic policy does not need to react at all.

Suggested Citation

  • Andreas Rees & Martin Hüfner, 2008. "As the US economy goes into recession, what should Europe do?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 61(07), pages 03-09, April.
  • Handle: RePEc:ces:ifosdt:v:61:y:2008:i:07:p:03-09
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    JEL classification:

    • F01 - International Economics - - General - - - Global Outlook
    • F59 - International Economics - - International Relations, National Security, and International Political Economy - - - Other

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