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hile globalization is perceived as a challenge both inthe United States and in Europe, the policy debate inboth regions differs widely with even the position ofthe right and left sometimes reversed.
Following standard stereotypes, it is clear that WAmericans are more pro-market than Europeans.
Does not the old continent struggle with the conse-quences of its politicians continuously fiddling around with the free-market forces? According to the same clichés, part of the differ-ence stems from the stronger leaning of Europeans towards the political left as the leftworldwide usually pushes for stronger government interventions.
A closer look at current national policy debates reveals a much more nuanced pic- ture. In some fields, such as free trade, it can even be argued that Europe is at themoment more free-market than America, with parts of the American left playing muchmore protectionist tunes than their European counterparts. And in other fields, theEuropean left surprisingly takes positions which in the United States are today oftenassociated with a certain breed of free-market Republicans.
While on both sides of the Atlantic challenges from globalization have been a INTERNATIONAL ECONOMIC POLICY
dominant topic in economic policy debate, the reactions have been quite different. Both the European Union and the United States have experienced extremely strong growth Sebastian Dullien is economics correspondent at the Financial Times Deutschland.
In January and February 2007, he was DAAD-Fellow at the American Institute for Contemporary German Studies in Washington, D.C. in Chinese imports over the past years, with the respectivebilateral trade balances with China deteriorating sharply.
In both regions, stories about the offshoring of thousands When it comes to simple trade in goods of jobs have featured strongly in the national media. Onboth sides of the North Atlantic, a very small portion ofthe toys or apparel sold is still made at home.
or services, calls for policy intervention However, it has been mainly American politicians who have started to blame the rest of the world for thedomestic industries’ problems. Not only is Democratic in Europe have been extremely rare. presidential hopeful Senator Hillary Clinton (NY) regu-larly referring to the American middle classes’ fear of hav-ing their jobs shipped abroad, Senator Jim Webb (D-VA)stated in his reply to President George Bush’s State of the cost countries while destroying jobs at home. There were Union address that it is the duty of the U.S. government to never calls for restricting trade or even having other coun- “to insist that [the American workers’] concerns be dealt tries adjust their exchange rates. Instead, the debate with fairly in the international marketplace.” The union- focused on domestic policy reforms to cope better with supported Economic Policy Institute even called for “a pause” in passing new trade agreements—something that The second surprising difference between the eco- would be unthinkable from a German union think tank.
nomic policy debate in Europe and the United States The U.S. Congress is now working on a number of broad emerges when it comes to how agents from the different trade and currency bills which again might threaten puni- ends of the political spectrum position themselves with tive tariffs against low-wage countries which actively respect to public deficits and possible bubbles in asset markets. While in Europe, conservatives are the primary In Europe, by contrast, there might be resistance to advocates of the reduction in government deficits, and the globalization as a symbol (as witnessed in the occasional left is more willing to accept higher borrowing, the situ- tearing down of a McDonald’s restaurant in France), or ation in the United States is reversed. Here, successive against foreign companies taking over domestic corpo- Republican White House aspirants have claimed that rations and laying off parts of the workforce. However, “deficits don’t matter” and advocated tax cuts even at the resistance against foreign investment can also be wit- expense of significantly increasing public deficits, while nessed in the United States, as seen in the current CFIUS the Rubin Democrats have demanded austerity and more (Committee on Foreign Investment in the United States) disciplined fiscal policy. In Europe, mainly conservatives renewal following the Dubai Ports World incident. And warn against both an overly lax monetary policy and the when it comes to simple trade in goods or services, calls encouragement of asset price bubbles, while in the United for policy intervention in Europe have been extremely States it is a collection of left-of-the-center pundits whohave been sounding alarms about bubbles in the real estatemarket. The laissez-faire officials in the BushAdministration, as well as the current and former Fed chairmen, have been much more benign towards possi-ble asset market misalignments than their colleagues atthe Frankfurt Euro-Tower.
Surely some part of these contrasts in the economic policy debates can be explained by differences in eco-nomic structure between the United States and most con- tinental European economies. First, all Europeaneconomies are much more open than the United States.
While at first sight this might increase the fear of global-ization, it seems to have the opposite effect. Workers rare. In Germany the long period of job losses after the employed in the export sector learn quite quickly how 2001 recession gave rise to Hans-Werner Sinn’s idea of important foreign business is for the well-being of their the “Bazaar economy”—the claim that German industry company, and their own job and income. For the workers was only expanding its export market share by out- in the Mercedes factories in southern Germany, the rest of sourcing the production of intermediary inputs to low- the world not only competes with their autos, but also SUMMER 2007 THE INTERNATIONAL ECONOMY 23
helps secure those jobs in the first place with low-value more protected in Europe, their representatives might not production going to foreign markets.
fear the consequences of a bursting bubble as much as In contrast, if European companies do not sell much abroad, it might be easier for managers to use globaliza- Moreover, low-income workers in the United States tion as both an excuse for results from bad management as might actually be hit harder by the popping of a bubble well as a tool to put pressure on its workers. In this con- than those in Europe. A special feature of the macroeco- text, it is interesting to note that even within largely pro- nomic imbalances and possible bubbles in the United trade Europe, the more open countries seem to be less States is the existence of the twin deficits in both the cur- prone to protectionism. France, perhaps the most protec- rent account and the government budget. This lack of tionist country in Europe, actually is the second-least open domestic savings makes the American economy very country in the Eurozone (after Italy), with an import pen- dependent on the import of foreign capital. Most scenar- ios of a correction of U.S. asset prices include a sharp A second factor helping the Europeans more easily devaluation of the U.S. dollar. This devaluation might accept globalization than the Americans is the more gen- well burden low-income earners disproportionally. In this erous social safety net. Especially in the very open group, a larger share of income is spent on food and man- Scandinavian countries, workers are well-cushioned from ufactured goods, both of which can be expected to become trade-induced structural changes, but in Germany or more expensive as the dollar depreciates. France as well the social system provides some relief from In Europe, in contrast, the possible bursting of a bub- the mishap of unemployment. Moreover, the stronger ble (say in the real estate sector of Spain or Ireland) is not redistributive policies in continental Europe make even necessarily associated with a depreciation of the currency.
permanent losses in some professions due to international The Eurozone’s overall current account is almost bal- trade more bearable as their relative loss in social status anced, and a decline in value of the euro in a magnitude as and disposable income will often be far less than the ini- some believe possible for the greenback seems unrealis- tic. Moreover, a larger part of Europe’s workers still work Europe’s rather generous social safety net might be in the manufacturing sector. Any strong depreciation of another reason why the political left in Europe is much the euro, while of course hurting the workers’ purchasing less concerned about asset price bubbles than the left in power, would at the same time make their jobs more the United States: As seen at the end of 2001, the bursting secure and might even provide for an increase in incomes of bubbles can cause recessions and job losses, especially as the profit situation of their companies improves, thus for the low-qualified as this group always loses out first in mitigating the initial loss in real income.
a labor market downturn. Since this group is relatively Finally, the difference in attitudes towards the gov- ernment budget deficit between the political left and righton both sides of the Atlantic might be explained with thespecial political economy of tax increases in America. At The laissez-faire officials in the Bush least since George H.W. Bush lost the presidential electionin 1992 after breaching his promise not to raise taxes, it istaken for granted that American voters punish tax Administration, as well as the current increases. But there is little evidence of such a consistentlarge voter response to tax policy among Europeans. Inthe United States, a large fiscal deficit might be used to and former Fed chairmen, have been push through cuts in government expenditure, especiallyin social programs (exactly as advocated by some con-servatives under the term “starve the beast”). In Europe, where citizens are actually keen on generous public spend-ing, a structural budget deficit might at the end be filled byhigher taxes without political recoil. Recent developments asset market misalignments than their in Germany illustrate this. The grand coalition of ChristianDemocrats and Social Democrats hiked the national VATrate by three percentage points with the larger part of the colleagues at the Frankfurt Euro-Tower. revenue being used to fill shortfalls in the budget, withoutstructurally touching any expenditure or seeing signifi-cant response in the polls.
The Deficit
be attributed to structural differencesbetween the economies. One addi-tional reason seems to be the nature of America. At least since George H.W.
Bush lost the presidential election in
George H.W. Bush
response to tax policy among Europeans. In the United States, a large fis- cal deficit might be used to push through cuts in government expenditure, especially in social programs (exactly as advocated by some conservatives under the term “starve the beast”). In Europe, where citizens are actually keen on generous public spending, a structural budget deficit might at the end be filled by higher taxes without political recoil. mum wage in Germany and the UnitedStates exemplifies this difference. In Germany, parts of The more diverse economic debate in the United the Social Democrats demanded the introduction of a legal States might have made it easier for politicians on both minimum wage, with proposals ranging from €5.00 to sides to deviate both from what is perceived as common €7.50 an hour. In the United States, Congress has voted to knowledge as well as from their own ideological preju- increase the legal minimum wage by 40 percent to $7.25 dices. For the left in America, the prospect of violating per hour. While a significant number of economists spoke the accepted economic wisdom that all countries benefit out for the proposal in the United States, it is hard to find from free trade thus might not seem to be as threatening a single prominent German economist who would sup- as in Europe, especially now that they can more easily port introducing any legal minimum wage. find at least some academics who show how some of their What is more, even the analysis of the consequences clientele might be better off with some kind of protec- differed widely. In the United States, surveys among tionism. And for the political right, deviations from the economists show that they believe on average that an New Classical ideas of hands-off-approaches to the econ- increase in the minimum wage by 10 percent would cut omy, both in macro stabilization as well as in agreeing to employment in the low-earnings sector by perhaps one a higher minimum wage, might be more acceptable—at percent (which would translate into a labor demand elas- least if giving up basic principles pragmatically helps to ticity of 0.1). In contrast, German economists claim that respond to pressing problems such as a recession or the an increase of wages at the bottom of the wage distribu- feeling of the average American of being left out of the tion by 10 percent would cut employment by 10 to 20 percent (translating into a labor demand elasticity 10 to While this openness may lead to inconsistent policy 20 times as high). While U.S. economists have produced and some resistance to globalization in the United States a vast body of empirical literature on the effect of higher that is not found in Europe, it also has its benefits. After minimum wages to support their low estimates of the all, at least over the past two decades, the United States demand elasticity for low-wage labor, the German empir- managed a much more impressive overall economic per- ical evidence is thin and often fails to distinguish changes formance than Europe with its more open-minded policy in macroeconomic environment and in the relevant wage approach, even with the occasional call for protectionism SUMMER 2007 THE INTERNATIONAL ECONOMY 25


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