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Austerity isn't working

What explains this difference? It's not that the housing market - which caused our troubles - is doing better in the US. Latest figures suggest house prices there are falling whilst they are rising in the UK.

Nor is the difference in monetary policy, at least if we compare the UK and US. Since 2008, the Federal Reserve has conducted $2.1 trillion of quantitative easing - equivalent to around one-seventh of annual GDP. But the Bank of England will soon have conducted £325bn - equivalent to over one-fifth of GDP.

A more promising possibility is that bank lending is growing much better in the US. In the year to February, loans to industrial and commercial companies grew by 12.2 per cent. That compares to barely any growth at all in UK and euro area lending. But is this difference a cause of differences in economic performance, or an effect of it?

So what might explain the difference in growth rates? One could resort to lazy stereotypes and claim that Americans have more "get-up and go" (or more irrational optimism and overconfidence) than we Europeans. But this is hard to establish empirically. Looking at Spanish property loans in the mid-00s does not suggest Europeans naturally lack optimism.

Instead, there's one glaring difference between the US and Europe - fiscal policy. The US is tightening less aggressively. According to OECD numbers, the US's cyclically-adjusted government deficit will fall only 1.3 percentage points between 2010 and 2012, to 7.7 per cent of GDP. In the UK, it will fall 1.9 percentage points to 6.5 per cent of GDP. And in the euro area it will fall 3.3 percentage points to 1.3 per cent of GDP.

Any schoolboy Keynesian could thus argue that the US is doing better than Europe because its politicians are not imposing serious fiscal austerity. Hopes of an expansionary fiscal contraction – which were always forlorn - have been dashed.

So, do supporters of austerity have a credible reply to this?

One possible defence is that the US has something Europe does not – exorbitant privilege. Thanks to its lingering reserve currency status and the country's low ambiguity, foreign investors are usually happier to hold US bonds than others. This means the US is more able to borrow heavily than other countries and is less vulnerable to a debt crisis. A European government trying to emulate the US would see rising interest rates.

How good an argument is this? One might reply that whilst it applies to members of the euro area, it cannot apply to the UK simply because even if investors don't want to buy gilts, the Bank of England could do so. A nation that can print its own money need never suffer a debt crisis.

But this isn't good enough. If investors were to become reluctant to buy gilts, sterling would almost certainly fall, causing a rise in inflation and squeeze on real incomes - with, given the low price-elasticity of exports - little offsetting benefit.

In this sense, the debate about fiscal policy is no longer about its impact on the economy – Keynesians seem to have won this. It is, instead, about whether fiscal tightening is necessary to prevent a debt or currency crisis. But then, for me, this was always the issue. And it is a question on which hard evidence is lacking.