BEWARE listening to metal rock band AC/DC. It might just help you come up with language that could worsen the relationship between Europe and the US.
That's apparently what happened to outgoing Czech Prime Minister Mirek Topolanek, whose country holds the European Union (EU) presidency.
According to the Financial Times (FT), it was the AC/DC song Road to Hell that inspired Topolanek's comment last week that US remedies for the global recession were "the road to hell".
The FT reports Topolanek said: "The US treasury secretary talks about permanent action and we, at our spring council, were quite alarmed at that... the US is repeating mistakes from the 1930s, such as wide-ranging stimuli, protectionist tendencies and appeals, the Buy American campaign and so on."
Topolanek's comments viciously ripped open the cracks between the US and Europe which had been papered over when finance ministers of the Group of Twenty nations met in March in London. That meeting was a prelude to the big event - the meeting of heads of state on Thursday in London.
You can bet your bottom dollar that the cracks will be papered over again on Thursday, with a bland and unspecific communiqué promising stimuli and action to regulate banks plus opposition to protectionism likely to emerge from the summit.
But from comments over the past few weeks, it's clear that there's a big sticking point between the Europeans and the Americans about the size of fiscal stimuli.
The Americans want to see the Europeans do more. The Europeans, led by Germany, are reluctant to rack up too much government debt. Then there are economists in the US who believe it shouldn't be spending as much as it is planning to as part of its $787bn stimulus package.
Debt trap danger
The dangers of accumulating too much government debt were brought home forcefully last week, when Britain had its first failed gilts auction since 1995. That means there weren't enough takers for the government stocks that Britain put on offer for investors. According to The Telegraph newspaper, the cover of 0.93 times subscribed is believed to be the lowest in history of gilts auctions.
Ultimately, the danger of piling up too much government debt is that interest rates on government stock will have to rise to draw in investors. This leaves the government in a situation where it has to borrow simply to pay interest - killing off other government spending plans and/or tax relief. That's a debt trap.
In the case of the US, higher interest on long-term government stocks affects the rates consumers pay for their mortgages as well. However, the world isn't yet in a situation where there is a danger of higher interest rates on government debt. That might be some years away.
Also last week, Bank of England governor Mervyn King took the unusual step of warning that Britain couldn't afford another stimulus package on top of measures already announced.
The EU has agreed on a €200bn government spending package over two years, which the US felt wasn't enough, given the scale of the global crisis.
Only time will tell
"It is a huge, huge effort. So instead of speaking already of the next plan, let's implement the plan we have agreed [on]," European Commission president José Manuel Barroso said.
A large part of the European argument is that, given the way their welfare states work, government spending rises automatically as unemployment increases.
This will boost the fiscal stimuli beyond the amounts already set aside and should be borne in mind when judging their efforts, they say.
But FT columnist Martin Wolf feels pretty strongly that the European objections are lame. He says: "It makes no sense to avoid action that would greatly lower the real economic costs of the crisis now, to eliminate a hypothetical and avoidable fiscal crisis later on. That would be like committing suicide in order to stop worrying about death."
There's just one important caveat about the fiscal stimuli. To the extent that they depend on spending, and not tax cuts, their effect won't be immediate. It takes time to get projects "shovel ready".
The US is right that the Europeans can do more to stimulate their economies. But chances are slim that this point will be made forcefully at this week's G20 summit, which is likely to be a lovefest aimed at reassuring the markets that everything that can be done is being done.
But don't be fooled. It very much remains to be seen whether the US plan for banks' toxic assets will work, while the fiscal stimuli will take time to kick in. Whatever the G20 says this week, there's still great uncertainty about what lies ahead.
- Fin24.com