Why US optimism matters

A key ingredient in the debate over the paths leading to global economic recovery is the debate over optimism versus pessimism. That debate is carried out vigorously all over the globe, including in the Gulf region.

But what about the sentiments of two of its major trading partners - the United States and Europe? With the advent of the Obama administration, Europe and the United States have in many ways moved closer together in terms of the economic and social policy concepts embraced on either side of the Atlantic.

This is primarily due to three factors: First, a general European trend over the past two decades to emulate more of the market-based approach of the United States. Second, the strategic preference of the Obama administration to strengthen the rights of the consumer, while becoming tougher on corporations.

And third, the fallout of the current severe recession, which is forcing US policymakers to opt for considerably more state spending than has been customary, whether to support the rather weak social safety net or to provide financial aid to ailing companies and industries.

These increasing similarities aside, one basic difference remains as pronounced as ever: When in doubt, Americans by and large take an optimistic view of the challenges ahead, while we Europeans generally tend to take a more pessimistic perspective.

This basic difference in attitudes matters a great deal to the entire global economy, because it has significant economic effects. With unemployment at a 25-year high, US newspaper headline writers and market commentators are feverishly looking for signs of a turnaround.

Larry Summers, the director of the National Economic Council and the top US economic strategist, seems to have a special knack for coming up with a steady supply of new inspirational analogies to boost Americans' confidence levels and to position the country for an economic turnaround.

Meanwhile, the European side feels caught in a trap. After first believing that the continent would escape this "made in America" financial crisis - a rare moment of European optimism, if you will - our economies were caught by the downturn with a vengeance. And so we are now roundly criticised for failing to recognise the depth of the recession - and hence playing catch-up on everything from the size of stimulus packages to interest rate cuts.

Why do these differences in economic sentiments and society-wide response mechanisms matter? Ultimately, it is all about the bond markets. On either side of the Atlantic, a key concern is to secure financing for what are bound to be very large bond auctions to deal with the consequences of the severe recession. There is a growing nervousness among finance ministry officials in all major nations that investors are concerned about the size of those auctions, the future economic growth prospects - and the comparatively low interest rates currently being offered for long-term obligations.

Given its quite rosy growth assumptions for 2010 - and in light of the 2010 mid-term elections - the Obama administration has a keen interest in turning around the sentiment toward more positive thinking about the economy, while always taking great care not to appear too optimistic.

After the events of recent years, it is certainly painfully aware of the danger that an abundance of optimism can be very detrimental to the nation's economic performance. With the benefit of hindsight, few people now doubt that the way into the current economic crisis was riddled with key sectors turning blindly optimistic.

Looking ahead, a key question in the global economy is whether Americans will preserve their customary sense of optimism. Viewed from a household perspective, doubts seem to be warranted. Americans are over-indebted, incomes have stagnated, the infrastructure is astonishingly weak, given the country's overall wealth level, to name but a few examples.

On the other hand, despite all the shortcomings - and the steep costs associated with the current financial crisis - even the large budget deficits that are now on tap for years to come must be kept in proper perspective. Many of the reforms now under way in the United States (such as in the healthcare sector, the financial industry, the infrastructure sector and so on), are bound to raise the efficiency of the US economy over the medium and long-term.

International investors are looking at a country where a stalemated political process had put meaningful domestic reform on hold for quite some time. Moreover, the European experience indicates that smartly structured benefit levels can indeed improve a society's productivity level.

If people, for example, do not have to be worried gravely about whether or not they do have sufficient health insurance, workers are more productive.

All of that is why, on balance, despite the current doom and gloom, US policy makers seem quite justified in their focus on strengthening the somewhat shattered roots of American optimism. And that is something that matters far beyond America's own borders.

In the ultimate analysis, this optimism - if properly and realistically applied - may turn out to be the most redeeming and vital American virtue in the concert of nations.

The writer is President of DIW (German Institute for Economic Research) in Berlin.