From the January 31, 2010 Wall Street Journal Europe
January 31, 2010
by Irwin Stelzer
All eyes seem to be focused on Greece, Portugal and those other countries—now including Great Britain—that are having difficulty bringing their fiscal deficits under control. And all ears seem to be attending to French president Nikolas Sarkozy, who talked last week at Davos of his desire to restructure the world's banking system, end the dollar's rein as the world's reserve country, replace floating exchange rates with some new Bretton Woods-style agreement, and otherwise lay violent hands on the economic and financial structure of capitalist countries.
Interesting stuff. But not a great deal to do with what is going on Europe's principal economies. There is little doubt that the EU periphery countries are in difficulty. Spain, Greece and Portugal, the latter last week reporting an unexpectedly high 2009 budget deficit equal to 9.3% of GDP, will continue to struggle as weak domestic demand prevents the recovery that seems to be gathering pace in "core" countries.
Business confidence is on the rise in Germany, France and even in somewhat beleaguered Italy, driven in the latter case by the fastest rise in retail sales since September 2005. As Goldman Sachs, itself beleaguered as a result of its bonus-paying proclivities, reports, "The European Commission's surveys … continue to portray a European economy that is recovering at a healthy pace." Economists at Bank of America Merrill Lynch agree— "the euro-zone recovery remains intact"—although they warn that such recoveries "don't move in a straight line."
Nor are they necessarily robust. The best example of the somewhat anemic nature of the euro-zone recovery is provided by the recently released forecasts of the International Monetary Fund. The IMF is forecasting global growth at a rate of 3.9% this year, with China and India leading the way at 10% and 8% respectively, in 2010 and almost that in 2011. Compare that with the forecast for Germany: growth of 1.5% this year, and 1.9% next year. Or with Bank of America Merrill Lynch's forecast of 2.1% for the euro zone as a whole. It will be quite some time for the excess capacity in many EU countries, most especially Germany, to be sopped up by a combination of internal and external demand.
Indeed, were it not for growth in China, India and other emerging markets, Euroland might not yet be out of recession. Exports are leading the way to recovery, and the bulk of those exports are headed towards China and India. If the industries that are suffering from competition by Chinese imports succeed in turning the EU protectionist, those export sales might just be significantly reduced—another example of the sensitivity of the recovery to government policy. Meanwhile, EU policy makers continue to complain about the pressures created by the reckless fiscal policies of the peripheral countries, while quietly reveling in the export-stimulating effect of the weaker euro.
Such growth as is being chalked up in the euro zone is heavily dependent on stimulative fiscal and monetary policies. Mike Turner, head of Global Strategy & Asset Allocation at Aberdeen Multi-Asset Fund is advising clients that "for the G-7 countries fiscal policy is the main support and activity would not be sustained without it." So far, so good.
The inflation rate remains benign, which means the European Central Bank need not raise interest rates. Yet.
Simon Junker, economist at Frankfurt's Commerzbank, in a recent economic briefing worries that "the ECB will be too cautious in reversing its easy policy stance. Hence, in a couple of years, excess liquidity might substantially boost the inflation rate."
The bank expects the area's economy to be on a sufficiently satisfactory growth path for the ECB to begin to raise rates at the end of the year. But not before. That will involve some exquisite timing not only by the ECB, but by fiscal policy makers in key countries. Standard Life analysts see the possibility of policy error by the world's authorities as "a key risk for investors in 2010." They are right.
Which brings us to Jean-Claude Trichet, president of the European Central Bank. Mr. Trichet is holding the line against a bailout of Greece, Portugal and other deficit-ridden euro-zone countries, while at the same time being careful not to be so tough as to force any of them seriously to consider dropping out of Euroland in order to recapture the power to devalue their own currencies—and pay off debts on the cheap. And trying to figure out how to get the euro zone growing at a respectable pace.
With reason. Talk at the Davos gathering of the world's financial muck-a-mucks is that the EU's inability to enact growth-inducing economic reforms is weakening its ability to prevent Europe from sinking into irrelevance in a G-2 world dominated by the U.S. and China. That prospect seems to be weighing heavily on Mr. Sarkozy's mind.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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