Everything the European and American politicians talk now a days corresponds to topics like 'Confidence Fairy', 'Moral Obligations', 'High Budget Deficit' and 'Financial Austerity'. They want 'High Budget Deficits' to be cut through 'Financial Austerity' as this is the 'Moral Obligation' of states that spent recklessly, so that the 'Confidence Fairy' will motivate investors to invest and production and employment will go up. What they don't talk of is direct govt. spending to boost production and consumption in the economy so that recession can be seen off. The reason: They fear inflation!!! These people are behaving as if recession has already been gone long back and its the period when recovery is making way for boom. Till his point US and European problems are same, from here they divert.
While both US as well most European nations have been running high budget deficits and have took unsustainable debt US has the benefit of having a central bank EverReady to work as "Lender of Last Resort". On the other hand ECB was never meant to act so and hence it has rejected to act so. So in reality European nations do require the 'confidence fairy' but, not in the way ECB and Germany are intending to create it. Germany doesn't want to bail out the nations unless they implement severe budget cut which will drastically reduce govt. spending in economies already bleeding from investment deficit. In reality even if austerity measures are put in place the yield on bonds of the PIIGS nations will not go down as market will expect further deterioration due to spending cut which if anything will increase the yield. So, budget restructuring should be there, even govt. spending should be reduced but govt. investment should be allowed to be increased even if it is by budget deficit ( note: spending includes transfer payments like unemployment benefit, pensions etc. along with the revenue & capital expenditure made by govt.). The only hope which every one in the world (a little exaggeration is allowed) thinks is the only way out except for ECB is that the bank should act as lender of last resort and start printing Euro to buy bonds of troubled nations. This will definitely bolster the market confidence and stop the speculators. As far as the inflation which ECB and Germany are fearing doesn't seem round the corner as difference between German nominal & real interest rate were near zero, as indicator of almost no inflationary expectation. So, ECB's credibility isn't on stake on inflation front but, Euro's existence is on stake and ECB should step forward to save it.
In the US the debt crisis doesn't exist as Fed is there ready to buy govt. bonds and interest on US debt is around two percent. So the public confidence isn't shaken. Dollar is appreciating which means it still is the most dependable currency in the world. The actual problem comes from the fact that US politicians aren't sure of the fiscal policy they want in place for crisis and in times when policy making should be swift, which is talked to be the greatest benefit of a presidential system over parliamentary system has hit a road block. President Obama depends on his opposition for approval of budget and amount of debt he can take as Republicans dominate the House of Representatives.US stock markets fell on 22nd November due to expectations that the Super-Committee will fail to reach a decision. However as against what is being preached by many the crash isn't a manifestation of fear that Budget Deficits won't be cut it actually manifests the fear that govt. might have to implement austerity program too should and fiscal stimulus might not be enough for a recovery. Republicans are vehemently talking of austerity when they are the ones who actually created the deficit and if not that then set stage for it by cutting taxes and increasing spending manifold. Democrats unfortunately aren't able to take a stand as they know public wants both, a recovery and a deficit cut. Since, Recovery hasn't made way for boom yet the deficit cut can take a backseat and come to front when things are sorted out. One more thing which Obama administration needs to do is actually increase its capital expenditure while keeping a check on transfer payments as it is the capital expenditure that can actually create employment and pave way for recovery. Transfer payments just give people temporary purchasing power which might not be enough a motivation for increasing consumption. Hence, in an economy with depressed consumption and high unemployment it is the direct spending on employment generation that worth every penny.
P.S.- ( These are my understanding of the situation as per the news paper articles and different economists columns I've read added up with my knowledge of Keynsian economics and nothing more than that.)
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