Paris, March 17 (Bloomberg) -- U.S. President George W. Bush, German Chancellor Gerhard Schroeder and French President Jacques Chirac are split over whether to wage war on Iraq. Their advisers embody another split: on economic policy. N. Gregory Mankiw, Bush's pick to run his Council of Economic Advisers, will champion the president's $726 billion tax-cut plan as the best way to revive growth. Germany's Council of Economic Experts, headed by Wolfgang Wiegard, says paring the budget deficit takes priority. Their French counterpart, Christian de Boissieu, whose boss is doing some tax cutting of his own, argues Bush's plan is too extensive. ``Bush is going too far with this tax cut,'' Boissieu said in an interview. ``He will increase America's budget deficit for several years.'' Germany's Five Wise Men, as the council is also known, concur. In its last annual report, the council said widening deficits were a ``brake on growth.''
These differences underscore the dispute among the world's biggest economies about how to spur global growth. Europeans say they fear a ballooning U.S. budget deficit will accelerate the fall of the dollar, hurt their exports and raise long-term interest rates. Those in the U.S. camp say the most important thing is to bolster demand in the short term. ``There is a sharp division between the two approaches, and on this issue I'm with Bush,'' said Charles Dumas, head of international research at Lombard Street Research Ltd. ``If you want to get back to potential growth you need a fiscal boost.''
Bond Market
The economy of the Group of Seven most-industrialized countries, which accounts for about two-thirds of the world's gross domestic product, expanded 1.3 percent in 2002 and 0.6 percent in 2001, the worst two-year showing since the mid-1970s, the Organization for Economic Cooperation and Development said. Europe's economy may even shrink this quarter, the European Union's executive branch forecast, after expanding an annualized 0.7 percent in the final three months of last year. The U.S. economy grew at twice that pace last quarter, putting the world's largest economy on a better footing going into 2003. So far there are no signs investors are growing concerned about rising budget deficits. Bond markets have surged in recent months, pushing yields on U.S. treasuries to their lowest in almost half a century. The yield on the benchmark 10-year note dropped as low as 3.56 percent last week, close to the 45-year low of 3.54 percent it reached in October. Some say the rally in bond markets will come to a halt after a war in Iraq. Once the economic recovery has taken off, the thinking goes, investors will flock back to stock markets and will also start looking at deficits again.
Beat the U.S. Deficit
``Right now no one cares about deficits because the war is all people think about,'' said Alain Kerguiduff, who manages 2 billion euros ($2.2 billion) in bonds at SG Asset Management in Paris. ``But after the war that will change. If you swamp bond markets with new debt, long-term rates will rise.'' It is ironic that European governments are worried about deficits now after failing to reduce them when growth was stronger three years ago, Kerguiduff said. Shortfalls in Germany and France not only both exceed the 3 percent ceiling for the 12 countries that share the euro. They also beat the U.S. deficit, which isn't expected to rise to that level until next year. As a result, American economists -- including former presidential economic advisers -- see little reason to heed any calls for a joint effort to boost growth. ``I'm not a great one for international policy coordination,'' said Murray L. Weidenbaum, chairman of the President's Council of Economic Advisers under Ronald Reagan and now a professor at Washington University in St. Louis, Missouri. ``If Europe is growing more slowly than we are, they ought to have a more stimulative policy, there's nothing for us to do about that.''
Surpluses to Deficits
Far from scaling back tax cuts, the White House wants to extend them. Mankiw's predecessor at the Council of Economic Advisors, Glenn Hubbard, designed a stimulus package for Bush then estimated as worth $690 billion. If Congress passes the plan, the deficit will increase to a record $307 billion next year, the White House predicts. Hubbard argued that the plan will create jobs and largely pay for itself. Enter Mankiw, a Harvard economist who got a $1.4 million advance for the 1997 edition of his textbook, ``Principles of Macroeconomics.'' The 45-year-old, who has written about the dangers of widening deficits, inherits Hubbard's plan and now has to sell it. ``I am supportive of what the president is doing,'' he told Agence France Presse in January, before being appointed adviser. Mankiw isn't available for interviews until he is confirmed by the Senate, said his assistant at Harvard.
Dog Named Keynes
Mankiw -- whose dog is named Keynes -- also led a group of economists dubbed the New Keynesians. They have built on the work of British economist John Maynard Keynes, who said governments should use fiscal policy to increase overall demand, known as aggregate demand, in times of stagnant growth. ``He is quite sympathetic to the current tax proposal,'' said Laurence Ball, an economics professor at John Hopkins University who wrote a 1995 paper with Mankiw. ``His views on the deficit are mainstream.'' Not mainstream by European standards. Under a 1996 agreement, governments of the dozen euro nations have to keep their budget shortfalls to 3 percent of gross domestic product or risk fines. ``In the U.S., the school of thought is New Keynesian Economics, which attaches a significant weight to aggregate demand,'' Juergen Kromphardt, one of Germany's Five Wise Men, said in an interview. ``In Europe we have to be more careful with deficits.'' French Tax Cuts Germany is taking more care than France. Scrambling to bring down a deficit that reached 3.6 percent of GDP last year, Schroeder has raised some taxes even as his economy is stalling. President Chirac hasn't been deterred from cutting taxes by orders from Brussels. Tax increases would stifle what little growth there is, his finance minister, Francis Mer, said earlier this month after being chastised in a late-night meeting with his European counterparts. France's deficit is set to rise to 3.4 percent in 2003, surpassing the EU's ceiling for the second year in a row, the Finance Ministry said last week. The European Union will publish final deficit figures for last year later today.
`Pay the Price'
Boissieu says he's concerned that Bush's package would increase U.S. imports and widen the trade deficit. The difference between what America sold abroad and what it bought from other countries reached a record $435.7 billion last year. ``I fear a scenario in which the fall of the dollar will be accelerated by the rise in the twin deficits because markets will ask: Is all this really sustainable?'' Boissieu said. ``I fear Europe will pay the price.'' The euro's 22 percent increase against the dollar in the past year is eroding demand for European goods abroad. Exports, which account for about a quarter of the region's economy, rose only 0.3 percent in Germany in the final three months last year, compared with 2.9 percent in the previous quarter. French exports slumped to their lowest level in more than a year in January.
Gaining Clout While under some presidents advisers had less of a role to play, President Bush listened to Mankiw's predecessor, according to William A. Niskanen, a former member of the CEA and now chairman of the free-market Cato Institute. Hubbard managed to persuade the President to propose reducing the double taxation of corporate dividends as part of his stimulus proposal, even though the Treasury Department opposed it. ``One thing that's happened in the Bush administration was that Glenn Hubbard had a very important role in developing and sending this dividend proposal, against the advice of the Treasury,'' Niskanen said. France's Boissieu, who is a professor at the Sorbonne, was appointed chief economic adviser to Chirac's Prime Minister, Jean- Pierre Raffarin, after the president's supporters won a majority in parliament last June. ``I have the prime minister's confidence,'' said Boissieu, who is on first-name terms with Raffarin. ``The link between advisers and policy action does exist.'' In Germany, the influence of the Wise Men is less direct, Kromphardt says. The five publish an annual report on the outlook for the economy and the merits of government policy. Schroeder is free to ignore them and their term of office -- a minimum of 10 years -- isn't affected by elections or changes in government. Still, ``the government has to bear us in mind. That's where the council draws its influence from,'' he said. The policy differences may be exaggerated, Boissieu said. Everybody agrees that taxes stimulate demand and that deficits mustn't get out of hand, he says. ``It's just a question of where you draw the line.'' //www.quote.bloomberg.com