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Visions of an Unstimulated Land

In Europe, the shoots are not looking very green:

Some private economists are even predicting that the American economy will resume growth in the fourth quarter, while Europe’s economy is expected to remain in recession well into 2010, after contracting an estimated 4.2 percent this year compared with an expected 2.8 percent decline in the United States.

“The shock originated in the U.S., but Europe is paying a higher price,” said Jean Pisani-Ferry, a former top financial adviser to the French government who is now director of Bruegel, a research center in Brussels.

As Tim Fernholz says, this is probably the closest we’re going to get to a natural experiment about different approaches to dealing with the huge negative demand shock inflicted by the collapse of the housing bubble. In the United States, we’ve had aggressive fiscal policy and extremely aggressive monetary policy. In Europe, monetary policy has been more restrained and fiscal policy has been much more restrained. Meanwhile, US growth looks set to recover faster. And the UK, which has been more aggressive than other European countries, also appears to be pulling out of the tailspin faster than Europe.

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All that said, this is an interconnected world we live in, and it’s possible that the dead brown shoots emanating from Europe will wind up sparking a secondary economic collapse and pull us back down.