There seems to be a dearth of real economic news this week as everyone struggles to digest what the implications of the post-Iraq-war will mean (and what the impact of SARS may turn out to be). I must admit that even while blogging this piece I had the feeling of deja-vu 'yawn yawn'. I think we all have a fair idea of what is happening in Europe, so until we actually see it in the figures there is likely to be a sense of eery unreality about the sitaution (to echo Steven Roach's post of last week). Nonetheless there are a couple of details asociated with the new EU growth prospects report ( here ) which are worthy of mention. Firstly the situation in Italy keeps rearing its head. I think the Commission really are starting to get brassed-off with the prevarication and lack of reality being shown by the Italian Government, and if any of the excess-deficit procedures are well-earned it will be the one being threatened now against Italy. In all the euro navel-gazing, Italy's preoccupying economic and fiscal future is the one which seems to attract least attention. Secondly the little detail about the 'bright spots in the report arise from countries outside the 12 member eurozone'. Is this simply a coincidence? What value can we place on being able to control your own fiscal and monetary policy, and having the capacity to address directly balance of payments deficits (even if the UK does not seem to be using it much right now). Going back to the Harrod Balassa Samuelson effect for a moment, if this argument has validity, then surely it should be applied to the current growth trajectory of the 10 enlargement countries as they approach EU lock-in.
Also of note is the throwaway comment about Italy's "transitory" measures to massage down its deficit, and the urging that it confront its "high levels of national debt and looming pensions crisis". The Italian national debt is now around 105% of GDP, and the pensions situation, despite two reforms, is still 'unresolved'.
On more general matters, one of the criticisms that I suspect may be levelled against me is that while I may score highly on analysis of the EU-euro problem, I am, with the exception of the immigration proposal (and possibly the Turkey and other third world enlargement one), a little short on remedy. I would say that this point is a fair one. I have no 'insta-pundit-insta-cure'. We are facing a new situation, and we need bold and unorthodox remedies: but this does not mean reckless ones. We have, in my opinion, a long way to go before we start to find our way forward, and it is not realistic to expect solutions tomorrow. This doesn't mean we shouldn't keep looking. This is what the internet, and all the debates that are taking place in the innumerable comments columns, are all about.
But one 'solution' which is not a solution in the accepted sense of the term is the one which is currently being presented as 'structural reform' in Europe. This brings me to the point where I have most reservations about the Stephen Roach argument. He is absolutely right about the imbalances being produced by a US-centric global economy in my view, but is completely unrealistic in imagining that this can raise the pressure for strucural reforms in Japan and the EU in a way which will produce alternative growth engines. This is, in my book, a non starter. Of course, the EU reforms are necessary: without them we would have the universal bankruptcy which Keynes so feared. But they will not produce a re-run of the 1980's, the panorama we face moving forward just isn't going to be like that. If we consider the labour market and pension reforms which are currently on the agenda in both Europe and Japan we should be able to see that effectively they will have all the hallmarks of a massive default. Firstly, the pensions reforms will effectively mean the devaluation of all the 'forced savings' which an entire generation had been preparing for its retirement. The money being devalued may not, as in Argentina, be in fixed-term deposit accounts, but the difference is only a technical one. A huge quantity of notionally accumulated wealth is going to be written-off on behalf of a large number of people.
Secondly, the labour market reform has a similar look to it. What is about to be written-down via this reform is the market value of all that accumulated workforce experience which resides in Europe's larger corporations. This writing down takes two forms. First lower salary expectations, and secondly lower compensation when jobs are 'bought out'. This is where the European situation is similar to the Japanese non-performing loan one. In Japan the majority of businesses are overvalued due to the fact that they hold equites and debt within their asset portfolio which is being counted at face, and not market, value. Part of the reform in Japan is to reclassify this debt. Well in the same way many Europeans have their own individual non-performing loans: the ones they made to the government pension scheme and the ones they made by dedicating their working life to a single company. For the baby boomers the time is now rapidly approaching when they hope to collect, and the reform is there to make clear to them that the glass is half empty. Now who can hope in these circumstances for a serious revival in European consumption and productivity. For starters just think - Irving Fisher style - of the debt dynamics provoked by this enormous write-down. It's gonna be much bigger than the bubblenomics Steven.
Europe's growth forecasts for 2003 tumbled on Tuesday, with warnings that the continent could fall into recession if tensions over Iraq endure and consumers suddenly lose confidence.The gloomy spring forecast by the European Commission cut baseline eurozone growth predictions from 1.8 per cent to 1 per cent. Italy risks joining Germany, France and Portugal in breaching the EU's budget rules.
Gordon Brown, the British finance minister who presents his 2003 budget on Wednesday, will be pleased that the Commission believes the UK has weathered the downturn "rather well", albeit with a rising budget deficit. The 10 EU candidate countries, mainly from the former communist bloc, also continue to outstrip the performance of the eurozone countries, with growth predicted to be 3.1 per cent this year and 4 per cent or more in 2004. Pedro Solbes, EU economy commissioner, said Europe needed to pursue tough policies to "inspire confidence" at what he described as "a crucial juncture" in the EU's history. "If anything, the EU's weakness in the face of a global downturn has underlined the need to further strengthen the economy's growth capacity and resilience to shocks," he said. But he warned of recession in 2003 in the US should Iraq continue to cast a shadow, oil prices reverse their recent fall and consumer confidence worsen. The forecasts were unremittingly downbeat, with unemployment in the EU expected to rise by 100,000 in 2003, the first rise since 1994, with joblessness at 8 per cent.
While the Commission accepts that many of Europe's problems are homegrown, it also points a finger of blame at Washington, arguing that the twin US budget and current account deficits create instability.It also says international tension over the likely role of the United Nations in administering a post-Hussein Iraq could also knock European economic confidence. Mr Solbes believes EU member states are now starting to realise the seriousness of their predicament. He offers support for the reforms already proposed by Gerhard Schröder, German chancellor.Francis Mer, French finance minister, has also signalled that he is now prepared to backtrack on election promises not to alter course, so as to meet France's obligations under the EU's stability and growth pact. But Italy is accused of taking "transitory" measures to massage down its deficit, and is urged to confront its high levels of national debt and looming pensions crisis.
Source: Financial Times