Seppel, your Post #15 is important. Nice exposure of Germany under Fischer/Schroeder.
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
Well, what's keeping the Euro so high is our devalued dollar. If we could mitigate our debt a bit, I'm sure we'd be back in the game with the Euro.
Since Germany and France are already ignoring debt limits, this crediblity issue is over.
Right. I remember a German FReeper argued that that move represented a complete breech of the trust that is needed to keep a currency afloat. Thus, he said, the Euro will die: it is now a matter of when.
"Germany's jobless rate rose to nearly 11 percent in December"
That's what restrictive labor policies will get you. As Sienfeld would say... Good luck with alllll that.
Seppel, your Post #15 is important. Nice exposure of Germany under Fischer/Schroeder.
This, ..., requires more ... fiscal policies.
Gerhard "Karl Marx" Schröder in action.
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