Growth in the United States is softening, the slump in Europe is deepening and Britain has fallen back into recession, heightening concern that efforts to cut budget gaps could go too far.
Fiscal austerity has been the mantra on both sides of the Atlantic for the past two years. The tide now appears to be turning.
In Europe, socialist Francois Hollande, who is favored to win the run-off election for the French presidency on Sunday, has laid out a growth agenda. Italian Prime Minister Mario Monti, after pushing through tough budget reforms, is calling on the European Union to back a growth plan.
European Central Bank President Mario Draghi wants a "growth compact" for Europe to complement its fiscal compact, an issue he is likely to be quizzed on at his monthly news conference on Thursday.
Even Germany, fast losing allies for its harsh fiscal medicine after the Dutch government fell over budget cuts, is modifying its tone. "We are not the (fiscal) consolidation Taliban," German Deputy Finance Minister Thomas Steffen said at a conference last week.
In the United States too, there are tentative signs the fiscal debate is poised for recalibration.
"Harsh austerity was all the rage, and it drove the (U.S.) Republican Tea Party landslide in 2010 and became the dominant prescription in Europe," said Greg Valliere, political economist at Potomac Research Group.
"Now it's in retreat on both sides of the Atlantic."
Analysts point to U.S. Senate Republican leader Mitch O'Connell's decision to withhold his support for the tough budget adopted by the Republican-controlled House, which would deepen domestic spending cuts beyond levels agreed in torturous deficits talks last August.
A new poll hints at a waning of support for the Tea Party, the driving force behind deep budget cuts. An ABC News/Washington Post poll on April 15 found that Americans by a broad 23-point margin say the more they hear about the Tea Party, the less they like it. Its support has slipped to 41 percent of Americans from 47 percent last September, the poll found.
U.S. Federal Reserve Chairman Ben Bernanke last week issued his sternest warning yet over the risks of sharp fiscal contraction. Numerous tax cuts are due to expire and budget cuts will kick in at year end, enough to withdraw $500 billion from the economy. Analysts say that would cut 3 to 5 percentage points from growth and tip the economy back into recession.
"There is, I think, absolutely no chance that the Federal Reserve could or would have any ability whatsoever to offset that effect on the economy," Bernanke said.
Although it is too early to tell exactly how the U.S. budget debate will play out in November's elections, analysts say an awareness is gradually building in both Europe and the United States that too-fast budgetary consolidation could actually damage the goal of debt reduction.
Investors also may be willing to give governments leeway.
"Politicians are nervous that loosening the fiscal brake will be taken negatively by markets. But we have reached the point where the contrary is true," said Martin Lueck, an economist at UBS Investment Research.
"If there is a realistic stance of supporting growth on the one hand and fiscal consolidation on the other hand, it will be well received," he said.
ESCAPING THE TRAP
Paul McCulley, former managing director at the giant bond fund PIMCO and now at the think tank Global Interdependence Center, says indebted Western nations are running full force into a liquidity trap. Households, corporations and governments are deleveraging at the same time, sucking all the drivers of growth from the economy and worsening budgets.
No matter how much money a central bank pumps in to hold interest rates low and ease deleveraging, it isn't enough to brake the vicious downward cycle as governments cut budgets, he argues.
"Fiscal austerity does not work in a liquidity trap and makes as much sense as putting an anorexic on a diet. Yet diets are the very prescription that fiscal austerians have imposed," he said in a paper delivered last month at the Bank of France.
John Maynard Keynes called this the paradox of thrift - by paying off debt and saving more, growth weakens and budget deficits and debt levels worsen.
The answer, said McCulley, is for governments to spend more, supported by a central bank that buys up government debt. This will reflate the economy, restore demand and avert depression, which in turn will allow government debt to be paid down.
The U.S. economy has not reached the point of ever-worsening deficits. But first-quarter GDP growth slowed to a 2.2 percent annual rate from 3.0 percent in the fourth quarter. A taste of whether the slowing continued into the second quarter will come in the April jobs report on Friday.
While analysts forecast 170,000 new jobs added, a gain from 120,000 in March, that would be down from the 246,000 monthly average seen from December to February. But seasonal quirks and warm winter weather may depress the number.
A national factory index and U.S. car sales data on Tuesday are expected to show steady growth, which would support the Fed view that the U.S. economy is gradually firming.
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