Sunday, May 11, 2003

A Grim Message For Europe

That's the economists view of the latest OECD Survey. They also endorse the 'should've cut sooner and harder' view of the ECB.

As the OECD points out, the gap between America and Europe is widening, with the euro area as a whole registering significantly poorer performance in the past few years. There is no prospect of an early reversal, at least in part because European economies have left themselves with very little room for maneouvre—and because what scope they do have remains largely unused.

It does not help that the European Central Bank (ECB) has been slow to reduce interest rates. The OECD reckons that there is scope to cut rates by another half of a percentage point: the IMF also said further cuts should be considered. In Europe, monetary policy is the main instrument of economic stimulus because the much-derided stability and growth pact has left no scope for fiscal relaxation. The budget-deficit limits set by the pact were intended to underpin monetary union, but they have already been breached. For the euro area as a whole, the budget deficit should have fallen to 0.3% by last year, and be set to disappear altogether in 2003. Instead, the deficit across the zone reached 2.3% in 2002, and is not now expected to return to balance until 2006 or thereabouts. France and Germany are finding it particularly difficult to meet the pact’s targets.

The OECD does not share the view of those who argue that the stability pact is pointless because it is damaging short-term recovery. Instead, it points out that the medium-term outlook makes curbing fiscal deficits necessary—not just to preserve the pact’s credibility “but because of the age-related spending pressures that are about to intensify over the next few years”. Without new measures, the OECD reckons the three biggest euro-area economies—Germany, France and Italy—will make little headway in bringing down their deficits. The report makes little attempt to disguise the OECD’s view that governments have mainly themselves to blame, for squandering the surpluses in the boom years.

It’s a grim message for Europe, especially when contrasted with the somewhat better short-term outlook for America, where the OECD expects a modest but steady recovery this year, accelerating in 2004. However, even that might turn out be optimistic in the light of the Federal Reserve’s latest survey of economic conditions across America, widely known as the “beige book”, published on April 23rd. This shows a “lacklustre” economy, with several parts of America growing even more slowly than earlier in the year.
Source: The Economist

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