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>From wsws.org
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> World Socialist Web Site www.wsws.org
>
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> WSWS : News & Analysis : World Economy
>
> Falling euro a symptom of wider problems
>
> By Nick Beams
> 1 June 1999
>
> Back to screen version
>
> The launch of the euro on January 4 was accompanied by the release of
> hundreds of balloons as finance ministers gathered in Brussels to
> proclaim a new era for Europe. Predictions were made that the euro
> could rapidly rise by as much as 40 percent on its opening exchange
> rate with the US dollar and soon become an international currency and
> store of value.
>
> But five months on, the euro has plunged by nearly 12 percent from its
> opening rate of $1.18, with forecasts that it will soon hit parity
> with the US dollar.
>
> The steady decline since the heady days of January accelerated last
> week with the announcement of an agreement by European Union finance
> ministers to allow Italy to ease its budget deficit goal for 1999 to
> 2.4 percent of gross domestic product from an initial target of 2
> percent. Italian officials insisted that lower than expected economic
> growth meant they could not meet the original target.
>
> Official predictions are for a 1.5 percent growth rate in the Italian
> economy. But most market estimates are for a rate of only 1 percent,
> raising the possibility that the deficit will blow out to as much as
> 2.7 per cent of GDP.
>
> Even though these projections are still below the 3 percent level set
> under the terms of the single currency stability pact, the concessions
> given to the Italian government have prompted concerns in banking
> circles about the future direction of the euro.
>
> While German chancellor Gerhard Shroeder sought to reassure markets
> with the assertion that the easing of Italian budget targets was a
> �one-off�, the president of the European Central Bank Wim Duisenberg
> had earlier issued a warning that the stability pact was �in the
> process of losing its forcefulness� and that further fiscal laxity
> could weaken the euro. The president of the German Bundesbank, Hans
> Tietmeyer, said he would �not be happy� if the euro fell further. His
> designated successor, Ernst Welteke declared that that drift towards
> parity with the dollar �had to stop".
>
> If the Italian budgetary position had been the only concern, the
> decision to relax the deficit guidelines would probably have had a
> limited impact on the value of the euro. But the Italian deficit
> problems are only the symptom of a wider problem�stagnation in the
> European economy.
>
> In an editorial on the euro last Saturday, the Financial Times pointed
> out that the �euro is weak mainly because the euro-zone economy is
> weak".
>
> �The euro-zone economy has been worse affected by demand shocks from
> Asia and Russia than forecasters expected. Germany and Italy have been
> the worst victims. The OECD has cut its forecasts for these economies
> by more than 1 percent since last summer. Together they account for
> half of the euro-zone, and so they have dragged the European economy,
> and the currency, down.�
>
> The editorial pointed to the problems this would create in the event
> of a fall in US growth rates.
>
> �The major cause for concern,� it declared, �should not be the
> weakness of the euro but rather the weakness of the European economy.
> If strong US growth falters, the euro-zone is in no position to take
> over as the engine of world growth. The outlook for the euro-zone, if
> business confidence surveys ... are to be believed, is worse than the
> grimmest growth forecasts suggest.�
>
> The editorial concluded with a call for a more vigorous implementation
> of the �free market� agenda demanded by the banks and financial
> institutions�cuts in social security and increased labour market
> �flexibility�.
>
> The European economies, it insisted, �need to sort out their unwieldy
> social security systems, liberalise their labour markets, and foster
> greater competition in their product markets. Such reforms were
> neglected in the run-up to the euro's launch. Now the euro is up and
> running successfully�although at a weaker rate than most
> expected�governments have no excuse. They must begin the difficult but
> unavoidable reforms needed to make the euro-zone a success.�
>
> Continuing recession in Japan
>
>
> The stagnation in Europe is only one expression of the problems
> besetting the global capitalist economy. Another area of continuing
> concern is the failure of the Japanese economy to exhibit any signs of
> recovery, despite the largest government expenditure program ever
> undertaken in the post-war period.
>
> A recent article by Massachusetts Institute of Technology economist
> Rudi Dornbusch warned that the escalation of debt in Japan could
> become the �biggest financial crisis of the postwar period because the
> problem is out of control and the management is both distracted by
> politics and deeply confused as to the depth of the deterioration
> already in place.�
>
> Dornbusch pointed out that while this may not be an issue this year or
> even the next, �when it comes it will be formidable.� �In a narrow way
> it is the Japanese recession�Japan is setting personal records for
> staying under water�which pulls down world growth directly but also
> adds to poor performance by limiting the recoveries of its Asian
> trading problems.�
>
> Contained within the recession, he went on to warn, was an even bigger
> problem�Japan's huge public debt and unfunded pension liabilities.
> Market recognition that the debt problem is �out of control� had the
> potential for a �spectacular credit crisis.�
>
> According to IMF estimates, Japan's public debt is now 130 percent of
> GDP. The OECD calculates that the net present value of pension
> liabilities is more than 107 percent of GDP�making the public debt
> liability the largest in the world.
>
> A possible scenario for the �fatal debt dynamics�, Dornbusch warned,
> was a �financial meltdown of Japan, driven by deteriorating credit
> ratings, increasing Japan risk spreads, worsening balance sheets and
> debt dynamics, loss of confidence and deepening recession. Once the
> ball gets rolling, as with any distressed company or country, it goes
> all the way. And there is no IMF or US for the bail out because the
> numbers are staggeringly large.�
>
> With economic activity in both Europe and Japan at or near recession
> levels, the world economy has only been sustained by growth in the US.
> But here too there are warnings of a rapid deterioration. The latest
> report by the Levy Institute Forecasting Center points out that the
> potential exists for a �dramatic deterioration in domestic and global
> business conditions".
>
> The report warns that global overcapacity and global debt excesses
> contribute to the danger of the worst global financial crisis of the
> postwar era and that �with the [US] economy riding on a huge but
> vulnerable stockmarket bubble, there is a thin line between continued
> prosperity and disaster.�
>
> �Although the world has moved away from crisis,� the report states,
> �the system's underlying vulnerability remains as great as ever. Any
> increase in stress on the system could quickly rekindle the global
> crisis, and this time we may not be so fortunate.�
>
> The Levy Institute points out that the growth in US demand, which
> plays the central role in maintaining world growth, has only been
> sustained by a run down in personal savings as a result of the �wealth
> effect� generated by the stockmarket boom.
>
> But this growth in US domestic demand, which has accounted for about
> one third of the world total since 1996, has resulted in an
> ever-widening balance of trade deficit. Already this year the trade
> deficit records for the first three months have been broken.
>
> In a major speech delivered on May 6, Federal Reserve chairman Alan
> Greenspan pointed out that there was little doubt that the �marked
> widening in our trade deficit on goods and services have played an
> important, possibly a critical role in supporting world stability
> during these trying years.�
>
> But as Greenspan noted, �there is a limit to how long and how far
> deficits can be sustained� because these deficits add to the US debt.
>
> �It is very difficult to judge at what point debt service costs become
> unduly burdensome and can no longer be sustained. There is no evidence
> at this point that markets are disinclined to readily finance out
> foreign net imbalance. But the arithmetic of foreign debt accumulation
> and compounding interest costs does indicate somewhere in the future
> that, unless reversed, our growing international imbalances are apt to
> create significant problems for our economy.�
>
>
>
>
>
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> World Socialist Web Site
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