June 12, 2003

Make That, "The Glass Is Only 1/8 Full"

Europe teeters on the edge of recession...

FT.com Home US: The European Central Bank on Thursday halved its growth forecast for the eurozone this year to just 0.7 per cent from 1.6 per cent, raising market expectations of further interest rate cuts in the months ahead.

The bank, which also cut its forecast for growth next year to 1.6 per cent from its earlier projection of 2.4 per cent, made in December, said the revisions were prompted by the rapid appreciation of the euro.

Inflation was projected at 2.0 per cent this year, slightly above earlier estimates, but was forecast to fall swiftly next year to 1.3 per cent, well short of the bank's close to but below 2 per cent price stability target...

Posted by DeLong at June 12, 2003 11:16 AM | TrackBack

Comments

It's nothing a few more $billion worth of tax cuts won't fix...

Posted by: Stan on June 12, 2003 11:55 AM

Can we take invade Europe, install a Bremer clone there, and make them all pass marginal rate cuts? We won't cut services to match it, though - that would give the game away!

Pootie

Posted by: Pootie Tang on June 12, 2003 01:00 PM

I believe the appropriate reaction to all this bad news is "oh, fuck." Why has the entire world's economic leadership got its heads in the sand? It can't be that anyone wants a major depression. So then why are we heading for one?

Maybe the Islamic world and India will lead us out...

Posted by: Randolph Fritz on June 12, 2003 06:46 PM

The European Central Bank has recently cut its signal refinancing rate from to 2.5% to 2% and the Bank's president has just indicated an intention to cut rates again should this become appropriate. As the inflation rate in Eurozone has come down to 1.9%, below the Bank's maximum target rate of 2%, there is scope for further rate cutting without jeopardising the credibility of the Bank's main policy target. But there is still some feeling among some European governments, shared by the EU Commission, that the Eurozone's Stability and Growth Pact - which restricts national fiscal deficits to a maximum of 3% of national GDP - is unnecessarily inflexible in present circumstances however well intended it was when adopted in the early 1990s to enhance fiscal disciplines on the part of those European governments with historic propensities for deficit financing.

Dedicated followers of threads here on the European economy and the Euro will perhaps recognise that at least some of us Brits believe the Euro is a contributing factor to Europe's woes. Doubtless fellow compatriots will chip to elaborate or disagree with the basic thesis that the Deutsche Mark got locked into the Euro at an overvalued exchange rate on launch of the Euro in January 1999. Since Germany's economy accounts for about a third of the GDP generated in the whole Eurozone, the effect of Euro appreciation on trend against the US Dollar and UK pound over the last two to three years has been to depress the German economy and thereby the economies of its main trading partners. On recent press reports of the first quarter's economic performance of the Eurozone, national economies accounting for about half the zone were recessed - Germany, the Netherlands and Italy.

An additional factor in the Eurozone is often dubbed "market sclerosis" or lack of market flexibility, perhaps best exemplified by the higher average rates of both unemployment and inflation for the Eurozone compared with Britain's economy outside the Eurozone. Schroeder's government in Germany has recently pushed through a series of measures evidently intended to liberalise markets and increase incentives for job seeking by reducing welfare entitlements. The French government is also engaged in attempting to push through market and welfare reforms. In both cases, there have been widespread public protests against the reforms. However, for a sceptical assessment of the significance of "labour-market flexibility" in Europe - see a paper by Robert Solow given at the British Academy and available at: http://www.britac.ac.uk/pubs/src/keynes97/text1.html

Yet another factor, although one with greater implications for the long term than the short-run, is the fiscal affordability of state pension entitlements with population ageing in western Europe. Some mooted welfare reforms, notably in France, are intended to address this.

Posted by: Bob Briant on June 12, 2003 11:08 PM

"Since Germany's economy accounts for about a third of the GDP generated in the whole Eurozone, the effect of Euro appreciation on trend against the US Dollar and UK pound over the last two to three years has been to depress the German economy and thereby the economies of its main trading partners. "

Since in the first year the euro got down a lot, I find this claim quite irrelevant: until last year the euro/dollar change was under the rate that would correspond their purchasing power.

DSW

Posted by: Antoni Jaume on June 13, 2003 06:56 AM

"Since in the first year the euro got down a lot, I find this claim quite irrelevant: until last year the euro/dollar change was under the rate that would correspond their purchasing power."

Have a look at Chart 2 in: http://www.bls.gov/fls/flsichcc.pdf which shows comparative DOC/BLS data from 2001 for the equivalent US Dollar cost of employment in manufacturing for a range of advanced industrialised economies. Employment costs in Germany are out of sync with most its main trading partners and the Euro has appreciated since then. High labour productivity in parts of Germany's economy - such as auto manufacturing - can offset the disadvantage of high employment costs and some other sectors with specialised engineering products have near monopolies in international markets but large parts of the economy do not have those competitive advantages.

Posted by: Bob Briant on June 13, 2003 12:58 PM

Especially since 1998, the world has been relying on America to generate growth. There has been too little domestic demand in Japan and Europe, and even in China and Asian countries from South Korea to Taiwan. The decline in value of the dollar has been against the Euro, the value against the Pound is fairly stable and against Asian currencies the dollar has been quite stable. The decline of the dollar against the Euro will merely accentuate the growth slowing on the continent.

We are caught in a slow growth period and though stock markets are rising again there is little immediate reason for optimism for a rapid growth recovery.

Posted by: jd on June 14, 2003 10:03 AM

"What is not widely known is that Germany could introduce an entire new currency, in an entirely orderly manner, without breaching the Maastricht Treaty.

"Of course, once Germany took the initial steps towards sneaking a new currency into existence, its negotiating position within the community would be hugely advanced. Other eurozone members, aware that a German exit would destroy the value of the euro, would be willing to make significant concessions to keep Germany inside. Such game-theoretic jockeying increases the chance that a German politician would want to threaten such a trick. . ." - from: http://www.ledr.com/guests/jdaw/papers/finmkts/deutsche-zentralbank.html

See also: http://www.ledr.com/guests/jdaw/papers/finmkts/deutsche-zentralbank2.html

Posted by: Bob Briant on June 15, 2003 07:47 AM

"Of course, once Germany took the initial steps towards sneaking a new currency into existence, its negotiating position within the community would be hugely advanced. Other eurozone members, aware that a German exit would destroy the value of the euro, would be willing to make significant concessions to keep Germany inside. Such game-theoretic jockeying increases the chance that a German politician would want to threaten such a trick. . ." -

Thanks Bob, now we're getting to the heart of the matter.

"Since in the first year the euro got down a lot, I find this claim quite irrelevant: until last year the euro/dollar change was under the rate that would correspond their purchasing power."

Hi, Antoni, Bon dia!!

I'm afraid long term the purchasing power of the euro zone will be determined by the markets, not by what europeans consider should be our purchasing power. At the moment the euro value is a default setting, in default of alternatives to the dollar. But this will not last. The eurozone is already in recession in my view. The southern fringe will fall rapidly into line when the reality sinks in, and watch out for Italy!!

Posted by: Edward Hugh on June 16, 2003 02:10 AM

The creation on an alternative currency would be, if possible, the death of the EU, which would rejoice the british eurosceptic. But then they do not want us to prosper.

Edward, the reference to PPC is from "The Economist", last year they argued that it was around 93 cent of a dollar per euro, and this year they said it was at 1 $ / 1€.

As for Italy, well what would you expect from a country ruled by its richest citizen? ;)

DSW

Posted by: Antoni Jaume on June 16, 2003 10:06 AM

The Euro value is being set not just via the dollar but via Asian currencies. There has been massive buying of dollars in Asia, so the adjustment of the dollar has been against the Euro, and Canadian and Australian dollars. Europeans are quite "worried" about Asian competition these days.

Posted by: dahl on June 16, 2003 10:09 AM

"Employment costs in Germany are out of sync with most of its main trading partners...."

We were in Germany and Switzerland the past several days and listened to several business people complain not about high labor costs in Germany or Switzerland but low labor costs in Asia. We were quite surprised at the complaints.

Posted by: bill on June 16, 2003 11:34 AM

Dear Mr. Jaume,
It may be there is some animus towards the EU and (by extension) the euro in certain quarters. But speaking for myself, I wish you every success. Is it not possible, though, that the Eurozone will perform better over the long run if it doesn't expand too quickly? It is a bit disconcerting that the European economies cannot resort to either fiscal or monetary policy. While this serves some benefits, the inclusion of too many counter-cyclical economies right away might result in chronic unperformance.

Don't get me wrong. At my site I'm always advocating certain "European" measures in the US, but I think it's possible to kill a good idea with excessive enthusiasm. The euro will surely catch on, but I think if its partisans are impatient and try to pressure the UK into joining prematurely, it could override many of the benefits of the euro.

Respectfully

Posted by: James R MacLean on June 16, 2003 01:51 PM

"We were in Germany and Switzerland the past several days and listened to several business people complain not about high labor costs in Germany or Switzerland but low labor costs in Asia."

We're in for another bout or two or more of prohibitive "anti-dumping duties" in Europe, I fear. We have this curious belief that refusing to buy the products of labour in Asia with low pay will force their wages up, presumably on the basis that long ago we used to complain about the low pay in Japan, Singapore and Hong Kong and look what that lead to.

Posted by: Bob Briant on June 16, 2003 01:56 PM

Stephen Roach also commented on the increasing complaints by Europeans about the "unfairly competitive" valuation of China's currency.

Then again, Stephen Roach just came back from Europe with the idea that labor markets are set to go through a dramatic change with a loss of bargaining power by labor blocs in a change for job security. Are European workers going to become as vulnerable to changing economic conditions as American workers?

Posted by: bill on June 17, 2003 10:35 AM

Watching BBC productions, I am astonished at how often Chinese or Japanese people are sneeringly characterized. The depictions are simply racist. This on several different shows.

Posted by: lise on June 17, 2003 12:28 PM

"Watching BBC productions, I am astonished at how often Chinese or Japanese people are sneeringly characterized. The depictions are simply racist."

I think I know what you mean. External observers are perhaps more dependable judges but I am not entirely convinced that references in British media to Chinese or Japanese people are any more racist than the ways we Brits tend to refer to mainland Europeans or "foreigners" generally.

Famously, from the times smogs and fogs were more frequent experiences than they are now, there was that evening paper headline: Continent cut off by fog. The implict Anglo-centric take on the universe is self-evident. We can't re-run history to establish the motivation but I suspect it is a unconscious legacy from Britain's position as world hegemon in the 19th century.

However, there are at least as many reasons for pride in that legacy as shame. There is something hugely ironic about Karl Marx, hounded out of the rest of Europe in 1848, being able to find refuge living with his family in London for the rest of his life to write turgid books on the inevitable demise of capitalism in what was unquestionably the leading capitalist power of his time. Much misery in the 20th century might have been avoided had he read the works of an approximate contemporary, John Stuart Mill, instead. London was also the venue for the 1903 congress of the Russian Social Democrats from which Lenin and the Bolsheviks emerged claiming victory as exponents of "revolution" as the more "scientific" means of achieving political reform. That tradition of tolerance of diverse and extremist ideologies has continued to the present, which is how all sorts of exile groups from countries with authoritarian regimes seem to have gravitated to London during the past several decades - quite possibly to our mutual hazard.

Posted by: Bob Briant on June 17, 2003 02:30 PM

lise - After a long search I've finally managed to locate a web text for: The True-Born Englishman at here: http://www.blackmask.com/books63c/trueborneng.htm This is a deliciously satirical poem about English chauvinism published in 1701 by Daniel Defoe, probably better known as the author of Robinson Crusoe. Just a few of the many lines which still resonate:

For Englishmen to boast of Generation,
Cancels their Knowledge, and Lampoons the Nation.
A True-Born Englishman's a Contradiction,
In Speech an Irony, in Fact a Fiction.

Posted by: Bob Briant on June 19, 2003 03:17 PM

Bob Briant

Thank you muchly.
Love your posts.

Lise

Posted by: lise on June 20, 2003 10:29 AM

Lise - Thanks. I only discovered Defoe's poem on The True-Born Englishman by chance a few years back even though he became renown for it at the time it was originally published. It has has been kept low profile since with print editions hard to come by and few of my compatriots nowadays seem to know of it but then Defoe was also inclined to other subversive sentiments. Consider this from: An Essay on Projects, published in 1697:

"I have often thought of it as one of the most barbarous customs in the world, considering us as a civilized and a Christian country, that we deny the advantages of learning to women. We reproach the sex every day with folly and impertinence; while I am confident, had they the advantages of education equal to us, they would be guilty of less than ourselves. . ." - from: http://etext.library.adelaide.edu.au/d/d31es/part16.html

Some literary historians regard Defoe as the first novellist in the English language but how does that compare with Murasaki Shikibu: Tale of Genji, written c. 1011 - author biog at: http://picpal.com/genji.html with text at: http://webworld.unesco.org/genji/en/index.shtml

Posted by: Bob Briant on June 20, 2003 02:00 PM
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