More denial on deflation and globalization for today's European WSJ:
COMMENTARY
A Strong Euro Makes
For a Weak Economy
By ROGER BOOTLE
For the first time in over four years, the euro traded above its initial value of $1.17 yesterday. This milestone is unlikely to be received with much celebration within the euro zone, however. Indeed, with every tick up in the euro's value, it becomes increasingly evident that the euro zone's central bankers are failing to respond to the clear economic needs of the region.
This stubbornness now seems destined to condemn the area to a further sustained period of underperformance compared with the United States. The current slow U.S. growth is understandable: After a burst of excessive growth at the end of the 1990s, it is no surprise that the U.S. should now look to growth in the rest of the world to haul up its own struggling economy. Remarkably though, the euro zone finds itself in the same position.
Although European politicians and officials are keen to blame the international situation for their woes, the statistics do not back that up. Indeed, they show that the key problem for the euro zone has been a lack of domestic demand. In every one of the last three years, total domestic demand growth in the euro zone has been lower than GDP growth: 2.9% vs. 3.5% in 2000, 0.9% vs. 1.4% in 2001 and 0.2% vs. 0.8% in 2002.
By contrast, the export sector has outperformed, with exports growing by 6.1% a year on average over the period 1991-1999, by 12.6% in 2000, 2.8% in 2001 and 1.2% in 2002 (even though the currency strengthened steadily against the dollar throughout the course of last year). In other words, what little economic growth there has been in the euro zone has come from businesses focusing on overseas markets to make up for the weakness of consumption at home.
That weakness is particularly evident in the euro zone's largest economy. While total domestic demand rose by 0.2% in the region as a whole last year, it actually fell by 1.5% in Germany. Indeed, Germany's meager GDP growth of 0.2% last year was entirely due to a 2.6% increase in exports.
This lack of demand is caused by interest rates that are too high for the euro zone in general and for Germany in particular. In addition, the EU's Stability & Growth Pact places severe limitations on the extent to which euro-zone governments are able to inject money into their economies by easing fiscal policy. And there has been a marked reluctance, particularly in Germany, to tackle structural rigidities such as rules that often make it difficult to lay off workers when demand is slack and an over-generous benefits system that has become barely affordable. As a result, consumers and businesses are reluctant to step up their spending.
Admittedly, consumer confidence has returned strongly after the ending of hostilities in Iraq, but business confidence remains weak and my view is that consumer confidence will soon fall back once the realization dawns that the structural problems evident prewar remain there postwar. For businesses, the surge in the value of the euro from $0.86 early in 2002 to more than $1.17 yesterday is a threat to the one relatively buoyant component of the euro-zone economy: its export sector.
The attitude of those responsible for the euro-zone economy to this poor performance has been masterly indifference -- not too different from the smugness that greeted the slowdown of the U.S. economy in the autumn of 2000, just before it became clear that the euro-zone was turning down too.
"It used to be the case that when the U.S. got a cold, Europe got pneumonia. Those days are over," French central bank Governor Jean-Claude Trichet told the Washington Post in January 2001. Piped in Belgian Finance Minister Didier Reynders in the same month: "We are not afraid of the evolution of growth in the U.S. We are armed to resist a slowdown." There "are good prospects in Europe, which are barely affected by the situation in the US," he added.
Today, that arrogant failure to respond to economic weakness elsewhere remains, as evidenced by the comments from European Central Bank President Wim Duisenberg after the ECB left euro-zone interest rates unchanged earlier this month. "Looking ahead, we continue to expect a gradual strengthening of real GDP growth to start later in 2003 and to gather more pace in the course of next year," he said.
That same day, the ECB announced what appeared to be a relaxation of its mandate, agreeing "that in the pursuit of price stability it will aim to maintain inflation rates close to 2% over the medium term" instead of the previous aim of keeping inflation below a 2% target ceiling.
Yet this was undermined by a decision to keep unchanged the existing definition of price stability: or "a year-on-year increase in the harmonized index of consumer prices for the euro area of below 2%." And it was undermined further by Otmar Issing, the ECB's chief economist, who told a press conference that "close to 2% is not a change, it is a clarification of what we have done so far."
The euro zone therefore seems destined to rely on its exports. The trouble is that that also applies to the U.S., Japan and the euro zone's largest export market, the U.K. Now we cannot all expand by increasing export market share. A world upturn depends upon domestic demand increasing somewhere -- but that somewhere is unlikely to include the euro zone. Meanwhile, it looks as though the strength of the euro is now going to make exporting difficult.
Once again, therefore, it looks as though a European recovery waits upon America.
Mr. Bootle is managing director of Capital Economics, the London based consultancy, and economic adviser to Deloitte & Touche. He writes a weekly column for the Sunday Telegraph.
Updated May 20, 2003
Now let us look at this carefully. Every major economy has production in excess of demand. Add to this new production coming on stream from the 2nd and 3rd worlds. The East Asians use rigged currencies and government intervention to keep out imports. The EU uses social benefits to pay off a generation of never to be employed workers. The rest of the world takes in dollars from the only [mostly] open market [US] then complains about our trade deficit and runs to sell their dollars before the exchange rate gets worse. The main East Asians peg their currency to the dollar so no mercy there. The Japanese intervene to keep the yen low enough so their economy doesn't finish imploding. That leaves the exchange rate between the US dollar and the euro to take the entire hit. Which it is doing with speed. Dollar is down some 30% against the Euro in the last six months with no end in sight. The Bushies aren't even pretending to e upset as France, Belgium and Germany get priced out of the world markets. They ignore the fact that this takes Spain, Italy and Holland with them. But remember that transnational finance capitalism including no controls on overnight money flows is just SO beneficial for all concerned...actions have consequences.
Scott
posted by scott 10:17 PM