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US vs EU – Who Will Win The Global Credit Crunch?

  • February 19th, 2009
  • Posted by Amelia Birnie

dollareuro.jpgAmerican business forecasters are predicting an extremely difficult 2009 for the European economy, in comparison with their own financial future in the US.

However, European Central Bank officials do not share this disheartening view.

US vs. EU

University of Pennsylvania Management Professor Mauro Guillén says that the 2009 economic year will prove to be more difficult in Europe than in the US.

“European economies are less flexible than the US system and will take longer to adjust to the changing economic climate, prolonging the downturn,” Professor Guillén says.

However, Finnish European Central Bank Official Erkki Liikanen has stronger views on the EU economic situation.

“The European Central Bank will take into account that deflation is not such a great threat in Europe as it is in the United States when setting interest rates,” Mr Liikanen says.

“The probability of deflation is smaller here.”


Fellow University of Pennsylvania Finance Professor Franklin Allen points out that the United Kingdom has been hit hard, especially in Ireland.

“The United Kingdom is experiencing a deep recession and Ireland is feeling this the most,” Professor Allen says.

However, ECB Official Mr Liikanen is not counting Ireland out just yet.

“In the case of Ireland, the markets are putting on them a very strong pressure,” Mr Liikanen says.

“We think that the best way to react to this market pressure for these governments is to step up consolidation now in 2009.”


One issue both the US and the EU can agree on is the global economic slump that threatens to stall Eastern Europe’s promising financial growth.

Professor Guillén predicts ‘some hard times’ for countries such as Ukraine, Serbia, Croatia and Romania.

“For the last 10 years, all these countries have been trying to make the transition to a market economy, and the financial systems are kind of shaky,” Professor Guillén says.

Mr Liikanen shares Professor Guillén’s concern and sympathizes with Austrian private banks, which chose not to financially support struggling banks in other parts of Eastern Europe earlier this month.

“I share with the Austrian authorities their concern about the situation of these economies and the risks involved in the situations of these countries,” Mr Liikanen says.

‘But politically we are dealing with this issue.”

“We are ready to discuss with the authorities of all these countries, not only with the Austrians, and to help them to coordinate the kind of support that is needed to avoid the deepening of the crisis.”


The ECB has cut its main rate by 225 basis points to two per cent in four moves since October last year.

Mr Liikanen, who also heads the Bank of Finland, says that the ECB’s target of keeping inflation rates at below, but close to two per cent meant it did not aim for very low inflation.

“History shows that zero interest rates would be no panacea in finding a way out of the financial crisis gripping the world economy,” Mr Liikanen explained.

‘Japanese experience from the 1990s and the US experience from the 1930s shows that lowering interest rates to zero is not necessarily by itself a solution to the credit crunch and deflation,’ Liikanen said.

However, US Professor Guillén believes Europe is likely to experience deflation due to the antagonistic nature of the UK.

“Europe will keep interest rates at 1.5% or 2%, but the United Kingdom will be more aggressive and may let rates fall to zero percent or 0.25%,” Professor Guillén says.

“Low rates have advantages and disadvantages; while they help soften the impact of recession, they can delay recovery.”


Mr Liikanen adds that the current problems in the financial markets might be due to excessively low interest rates earlier this decade.

“One cannot rule out the possibility that in the future current problems are shown to have originated from too lax monetary policy in the years prior to this crisis,” Mr Liikanen says.


Helsinki Times, Finland, ‘Finnish ECB official has strong views on the EU economic situation’, 06.02.09,, (19.02.09).

Forbes Business News, ‘Global Outlook For 2009’, 12.01.09,, (19.01.09).

Reuters, Brussels, ‘EU’s Almunia comments at news conference’, 18.02.09,, (18.02.09).