Europeans against tax cuts?

Interesting revelation that just came out of the recent G-7 meeting that shows just how different the US is from our allies in Europe.

It seems our friends in France and Germany, along with the ECB president Duisenberg and the chair of the “eurogroup” of EU finance ministers, don’t like our plan to cut taxes in the US. The British and Canadians understand our reasoning for cutting taxes (their economies are set up very similarly to ours) and agreed, in essence, with the US position that an occasional deficit is ok.

The first thought that comes to mind is that it is none of the G-7’s business, and certainly not any business of France or Germany given their recent behavior, if we cut taxes. It’s bad enough that the EU (read: France and Germany) is attempting to meddle in our foreign affairs. They have absolutely no right to lecture us on financial matters.

But that leads to the question of why do they feel it is necessary to “assist” us. They’ll almost certainly make the argument that with today’s interrelated economies, it is impossible for one nation to make a change without their being a carry over effect to others. This is all true, but it still leaves open the real reason behind why they fear a US tax cut.

The chair of the “eurogroup” raises the specter of twin deficits – fiscal and balance of payments. He claims that they “may create sustainability risks.” Again, his comment is accurate, but he misses the point. We aren’t trying to run permanent deficits. We are considering running a deficit to stimulate demand. Increased demand across the board should lead to more sales for European companies. You would think that this would be acceptable to the Europeans.

But the Europeans are still concerned. Why? Let’s quickly compare the US economy to the European economies. In the US, the quest of a business is to maximize profits by minimizing expenses. This is usually achieved through economies of scale. Therefore, higher demand from tax cuts and deficit spending would lead to increased profits of US companies and better competitive strength in the world markets. The US economy would then grow out the deficits and life would be good in the US. But it would also prove the failings of the European economies – again.

The socialist model that the Europeans use is based on the idea that the economy exists only to support the social support net. Business profit is subordinated to the concept of wealth redistribution. With the new EU rules preventing the running of deficits, a European tax cut would lead to a reduction in social programs. Not a good situation if you’re a politician looking for re-election. The Europeans instead want to cut interest rates to try to stimulate their economy. But again, the goal is to increase tax revenue, not to increase business profits.

The US Federal Reserve has already cut interest rates about as far as they can realistically go. During the Feds rate cutting process the European Bank refused to follow suit, hoping to attract additional investments through better returns. This is not a bad idea, so long as the Bank doesn’t cripple the economy in the process. However, the European Bank allowed the EU economies to become desperately weak. They are now going to start taking the actions they needed to take a year ago.

The German government is very shaky right now. A swift US victory in the Iraq, combined with a tax cut that benefits the US people would almost certainly be enough to topple the German government, if it doesn’t fall sooner. For the Germans, opposing the US tax cut is a matter of governmental self-preservation.

The French government has a while before the next round of elections. But that would almost certainly put the current French government in a poor position going into a new election cycle. Again a quick victory in Iraq, which proves the French government to be nearly irrelevant in foreign affairs, combined with a US economy gaining strength due to the tax cuts would make the obstructionist government look like a really bad idea. For the French it is also a matter of self-preservation. However, it could also work to Chirac’s advantage if the US recovers enough to pull the French out of their economic malaise.

For the ECB, and to a smaller degree the EU finance ministers, this matter could be a critical juncture in determining the true powers of the ECB. If the ECB manages to pull Europe out of their current trouble, the Bank’s power will be almost as great as that of the US Federal Reserve. However, if the European governments view the situation as US growth pulling Europe up again, the ECB will be greatly weakened in the power it exercises over member nations.

The world economy is interrelated and a tax cut here will certainly have a residual effect on the Europeans. But regardless, the US has to make decisions on what is best for the US. Sometimes, that will mean listening to the Europeans; sometimes it means going our own way. This is a time to go our own way and cut taxes. The growth in the US economy will more than offset the instability that will come with the change in governments in Europe. Perhaps we can even hit the daily double and end up with more friendly governments in France and Germany. But even if we don’t, a tax cut will help to improve the lives of ordinary Americans and is therefore a good thing for the US.