US Treasury Secretary exclusive

The US Treasury Secretary John Snow is in Europe this week talking up the need for growth - and criticizing what he calls the straitjacket of the Stability and Growth Pact, the rules which, in theory at least, put strict limits on Eurozone budget deficits.

America doesn't believe in budget straitjackets: but it certainly believes in budget deficits. Currently it's at an all-time high of 455 billion dollars.

Our economics correspondent Stephanie Flanders secured the only TV interview with Mr Snow.

Click here to watch the report

JOHN W. SNOW:
I, John W Snow, do solemnly swear...

FLANDERS:
To uphold the constitution and talk as little as possible about the deficit. John Snow used to run a railroad. Now he's America's 73rd Treasury Secretary and George Bush's 2nd. Job one these days, persuading the world that the American economy is back on track. In the boom years of the 1990s, America's growth rate averaged about 4% a year. But when Bush took office, the economy was already slipping into recession. It soon got over it. But growth since then has been pretty mediocre: on average about 1.7%. That, coupled with three sets of tax cuts and runaway spending, has left the public finances drowning in red ink. In 2000, America had a budget surplus of $236 billion. Yesterday, the White House admitted it would run a deficit this year of $455 billion - a swing of nearly $700 billion in just three years.

SNOW:
It's been a weak recovery and now I think with the tax bill, the jobs and growth bill, that the President signed at the end of March, we're beginning to see the American economy come back. We are looking for a much higher growth rates for the second half of the year.

FLANDERS:
You mention the stimulus packages. Do you think they could have been better designed as stimulus packages?

SNOW:
It is well designed tax policy in the sense it makes good economic sense. It is good policy for now but good policy long-term. So what is the policy really? It is the lower marginal tax rates. Most economists will say you always get more of anything that you tax less. More work, more energy, more resourcefulness, more investment.

FLANDERS:
Obviously, it is not going to be long- term because almost all of those tax changes as the bill is written now would disappear?

SNOW:
Not if were successful. The plan is to make those virtually all of those reforms improvements in the tax code permanent.

FLANDERS:
That would add to the deficit. The new forecast that the White House put out yesterday, incredibly high deficits?

SNOW:
I missed the announcement yesterday. This is the deficit going up to the 400 type number. Which is still very manageable. That is a little over 4% or of the GDP of the United States.

FLANDERS:
As you know, chairman Greenspan was talking yesterday and he did say over the long-term this big shift could raise issues about crowding out the supply for private investment?

SNOW:
The deficit that the chairman talks about as well as myself is the deficit that comes from the social security plans and the mediocre plans. These unfunded commitments to future generations. I'm talking about the current deficit, the 400, 450 billion. It is large, it is manageable in the sense it wont disrupt the financial markets. As we grow the economy we can bring it down. Our budget forecasts had it coming down to I think below 1%.

FLANDERS:
Snow has another even bigger deficit to worry about - this time with the rest of the world. The current account deficit for 2003 is on course for over $600 billion or 5.7% of GDP. That leaves America needing to borrow over $2 billion a day from international investors - just to stand still. To narrow the trade gap everyone knew the dollar had to fall. And now it has - by 17% against the rest of the world, just since the start of last year. Against euro, it's lost more than 25%. Do you worry sometimes that Japanese investors and others will wake up one morning and think, maybe we're not going to put so much in America any more.

SNOW:
I would like to see the rest of the world buy more from the United States. That's the heart of this issue. The rest of the world isn't going to be in a position to do that, unless their domestic economies are stronger. That's a reason you hear us say, the President of the United States say, we need to make growth a priority for the world economy. But the United States is a very attractive place for capital, we treat capital well. Provide probably on a risk adjusted basis the highest returns on capital. So I think America will continue to attract ample capital.

FLANDERS:
Now the dollar, there was a long-standing strong dollar policy as it was known in the previous administration. There was ambiguity about that in this administration. There has been a dramatic fall in the dollar especially against the euro. Maybe you can clear it up, is the policy changed, is the US administration no longer concerned about the American dollar.

SNOW:
No. I think we have repeated over and over again the support for the strong dollar. The President said it. I've said. It there's no daylight between us. And it remains the policy of the United States. But - we have said though, that we believe in the relative value of the dollar being set in competitive open currency markets with interventions kept to a minimum. And made the point that nobody can devalue themselves to prosperity. The best we can do is focus on the domestic economies, make sure they're not inflationary, high productivity.

FLANDERS:
You say you can't devalue your way to prosperity. The dollar has fallen. People in the rest of the world worry about the US exporting deflationary pressures to the rest of the world. Are they right to be concerened?

SNOW:
I don't think so. The currencies adjust to the under lying basis of the rates. That's what should happen, that's the nature of our freely fluctuating exchange rates.

FLANDERS:
Snow's other big mission this week: getting Europe to pull its finger out. America may not have expanded fast last year, but it still accounted for 71% of growth in the G7. This year it will produce about two-thirds of rich country growth. The largest Continental economies are hardly managing to grow at all.

SNOW:
I would like to see higher growth rates in Europe. I'm pleased to see the leaders of Europe beginning to focus I think with greater intensity on the whole question of growth. In France, the president's call for dealing with the pension issues, making them less of a burden on productivity and outputs is suggestion that the stability rules be looked at to see whether the 3% rule is consistent with long-term growth. All of that seems to me to be a focus on growth. I'm delighted to see that and welcome it

FLANDERS:
The fiscal rules they haven't been able to what the US has done, the massive swing into deficit. Do you think that was a mistake in the design of the euro.

SNOW:
No I don't. I think the focus on defer sit control is a healthy and a good thing. But economy should not put themselves in straight jackets either. And it's always important to go back and examine underlying rules to see whether they're producing the results desired. After all it's a stability and growth backed. And I think the suggestion by the President Chirac to take a look at that and see whether it's the rules, the rules are consistently promoting growth as well as stability is probably a healthy call. I hope there's a debated on that.

FLANDERS:
One last question, you're a relatively new secretary, every senior economic official of the administration is no longer here that was here at the end of the year. Do you think it's affecting the administration's credibility on economic policy, that there's an a high turn-over.

SNOW:
That's not unusual in American administrations. We still have the President, and he sets the policies.

FLANDERS:
And you'll stick around?

SNOW:
I would hope so!

FLANDERS:
Thank you Mr Secretary.

This transcript was produced from the teletext subtitles that are generated live for Newsnight. It has been checked against the programme as broadcast, however Newsnight can accept no responsibility for any factual inaccuracies. We will be happy to correct serious errors.