Posted on 01/24/2005 2:05:57 PM PST by knighthawk
For a German chancellor, it was the ultimate put-down. Gerhard Schröder called last week for a relaxation of Europe's tough rules on spending and borrowing only to be slapped down by the Bundesbank. Germany's central bank said the state of public finances in some European countries was very problematic, and could threaten the fiscal credibility of the eurozone. Schröder's point is that the best way to establish the credibility of the single currency would be for Europe - and its largest economy, Germany - to grow more quickly. He sees the toughness of the stability and growth pact - designed, ironically, by Germany in the 1990s - as part of the problem rather than part of the solution. What is more, he is right.
It is well known that the eurozone has failed to raise its long-term growth rate. Even the area's recent recovery has been fragile and vulnerable to weaknesses in the rest of the world. In fact, the eurozone has benefited the least among the G3 (the others being the US and Japan) of the US-led world recovery and life could be even tougher in 2005 if, as seems likely, the US's growth rate moderates.
Europe's exports would slow significantly if that happened, increasing the pressure on policymakers to come up with strategies for faster growth.
Of the area's two leading economies, Germany has enjoyed the more rapid growth in exports but domestic demand has remained painfully weak. France has seen faster growth in domestic demand but its export performance has been less strong. Overall, the eurozone's export performance has been stifled by a loss of competitiveness since the end of the Iraq war, largely due to the rise in the value of the euro.
The underlying reason for the weak domestic demand in the eurozone is the relatively tight stance of economic policy. Fiscal policy has turned expansionary since 2001, but the stimuli have been small compared with the US. The stimulus was only 0.8% of GDP in 2001, 0.9% in 2002 and 1.4% in 2003.
True, there were direct tax cuts in France and Germany last year, but they were financed by indirect tax increases, a broadening of the tax base and spending curbs. Fiscal policy has remained neutral. Although the minimum refinancing rate has been unchanged in the last 18 months, rising inflation has recently eroded the real cost of borrowing. However, external monetary conditions have deteriorated in the past three years because of the strong euro, so overall monetary conditions have remained largely unchanged.
With inflationary pressures picking up as a result of the surge in oil prices, the European Central Bank has expressed concern and is unlikely to cut rates. Nonetheless, the risk of deflation from the oil price is higher than the risk of inflation. The ECB should cut rates, instead of contemplating when to start raising them.
The conclusion from this analysis is that eurozone exports are likely to slow significantly because of world economic developments, compounded by the previous losses in competitiveness. Unless, of course, domestic demand turned around, thereby mitigating the negative effects of falling exports.
This, however, requires more coordinated reflationary monetary and fiscal policies. The latter would have to be more than the piecemeal changes grudgingly accepted by the European commission after both France and Germany escaped penalties for breaching the stability pact. Countries that join the euro would still have to abandon any effort at macroeconomic stabilisation, let alone coordinated economic action. The way to achieve proper coordination of eurozone economic policies is to abandon the stability pact in the short run to enable countries to expand, along with lower interest rates. In the longer run what is desperately needed is a eurozone-wide fiscal policy, properly coordinated with monetary policy. This would also require the ECB to change focus from merely price stability to both price stability and the level of economic activity. On this score a leaf from the US's book might not be a bad move. Just as the Federal Reserve System constitutionally embraces both objectives, so should the ECB.
· Philip Arestis is university director of research, Cambridge Centre for Economic and Public Policy, University of Cambridge; professor of economics, the Levy Economics Institute, US. Elias Karakitsos is professor and chairman of global economic research; associate member, Cambridge Centre for Economic and Public Policy
If people want on or off this list, please let me know.
The Guardian admits this? I thought Bush was an economic blight on the world???
In 10 to 15 years the EU will cease to exist. It is an inevitable fate.
What? A tightly controlled government body cannot make everything perfect? Say it isn't so!
Would relatively low tax countries accept this?
what the eurozone really needs is to start cutting damn taxes and stop being quasi-socialist.
Also I don't see the Euro remaining as storng as it has over the next year really. Our interest rates are rising its only inevitable that the dollar regains some strength. At least I hope heh, Im studying abroad in europe next spring and I'd really like the dollar to be back on par with the Euro, itd make thisgs significantly cheaper. Hope its back to about 80 cents or so to the Euro by late May that would be great for my trip abroad then, although again the higher dollar-euro value would be even better than simply 80 cents heh.
A german friend tells me that the older german's have a lot of money, but won't spend it because they don't consume a lot because things are so expensive..so it sits in the bank.
They don't invest much in stocks.
The friend is buying a condo near Munich..the price is less than any near a major city in the US, even at today's Euro rate.
Business's won't hire people due to the high cost of benefits and the inability to fire..or they hire on a contract basis if they must.
To raise growth, you need to cut govt. spending, period. The cost of govt. is the percentage of gdp that is spent by govt., not the tax rate.
This is a load of crap. The tip-off? Anyone agreeing with Schroeder has GOT to be wrong!
Europe doesn't need a "fiscal stimulus," they need to cut their confiscatory tax rates and get the government off the backs of the producing class.
That'll never happen, though, with their current welfare-state mentality. The government needs every pfennig they can get.
"Business's won't hire people due to the high cost of benefits and the inability to fire..or they hire on a contract basis if they must."
What is their unemployment rate?
BERLIN - Germany's jobless rate rose to nearly 11 percent in December, the government's labor office said Tuesday, the same day that France said its growth stalled in the third quarter.
The number of Germans out of work was 4.464 million in December — 206,900 more than the previous month and an increase of 149,200 from December 2003. The unadjusted jobless rate spiked to 10.8 percent from 10.3 percent in November, the Federal Labor Office said.
Not at all. The Eurozone has no credibility to threaten.
ping!
"Below is your excellent summary of the German leaders and their political party for the past 6 years":
The only things they introduced the last 6 years:
1. Homosexual marriage
2. Bring Turkey into EU, thus bringing 13 Million potential Muslims into Germany
3. Trash Bush and the USA
4. Depress the economy by an avg. 1.5-2% annually
5. Increase deficit
6. +2 Mio unemployed
7. Hate Crime Laws aimed at churches
8. Illegal immigration up
9. Further degrade military
10. Military sanctions against Israel
11. Socialist/Green rot
12. Kyoto protocol which throttles German economy for fantasies.
13. Laws to lower the age of consent so that dirty Green homos can have sex with boys.
These people are offensive. Everything they say or do is per definition anti-Christian.
Rush was dumbfounded, wondering aloud who this idiot CEO thought his market for the freedom and individualism of personal communication devices would happen to be, for goodness sake!!!
I happen to think the terrorist are going to hit the weakened old EU so hard they'll be forced to come round to our techniques, like we've been forced to come round to Isreal's in the last 3+ years since 9-11-2001, don't you agree?
The Scandiahoovians had better get that nerve that runs between their eyeballs and their differentials surgically cut to get rid of their "old europe" point of VIEW, too!!! I think the baltic states may begin to out-do those old thinkers economically, very soon!!! That'll make their eyeballs pop outta their danged heads!
Nothing means personal freedom like Volvos, Nokia Cell Phones and Erickson notebook PC's!!!
I think the EU is doomed to fail, but it won't fail until it's painfully obvious to the rest of us that it already has, which means it still has several more years, perhaps even 20, remaining.
Oh, but surely not to resemble the awful Americans.
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