Thanks for this, I was wondering about Europe. Also, totally off the subject, are you Turkish?
Joanna At 12:40 PM 09/22/2002 -0700, you wrote: >Europe Is Giving Up on Itself > >Stephen Roach (New York) > >Global Economic Forum, Sept 20, 2002 > > >These past two weeks in Europe have been sort of an epiphany for >me. The hopes and promises of the European Monetary Union (EMU) >are now ringing hollow. Eleven cities later -- on the Continent >and in the UK -- and there can be no mistaking the sense of >despair that is gripping this region. Europe has lost its way. >And with a deep sense of resignation, the Europeans know it. > >The summer of 2002 unmasked the fault lines in the "new" Europe. >Three critical flaws emerged -- the first being Euroland's lack >of autonomous support from domestic demand and a concomitant >hypersensitivity to the ups and downs of external demand. The >2Q02 GDP report said it all: Domestic demand accounted for a mere >0.1 percentage point of pan-regional GDP growth (not annualized); >believe it or not, that actually represents an improvement from >the relatively stagnant conditions in the preceding three >quarters. In the spring period, a modest rebound in private >consumption was almost completely offset by yet another >contraction in fixed investment. > >Given this anemic growth in domestic demand, the Euroland growth >story is now more dependent than ever on the US-led global trade >cycle. While the external sector (net exports) also added 0.1 >percentage point to Euroland GDP growth in the second period, >there is good reason to believe that this contribution diminished >over the course of the summer. That's certainly the verdict from >the sharp recent fall-off in business surveys across the region. >And it also makes sense in the context of weakening demand in >America, as underscored by July's 1.0% drop in US imports -- the >first such decline of the year. And the lagged effects of this >year's appreciation in the euro can only reinforce this trend. >All it took was a double-dip scare in America for growth in the >euro-zone to screech to a virtual standstill. Lacking in domestic >demand, disturbances in the broader global economy have been >magnified insofar as their impact on pan-European growth is >concerned. Can you imagine what would have occurred had there >actually been a full-blown US double dip? Or what might happen if >there is one in the not-so-distant future? > >Wrong-footed stabilization policies are a second fault line that >is crimping Euroland growth. Given the covenants of the Stability >Pact -- deficit constraints of 3% (as a share of GDP) -- the >region is unable to jump-start its economy through fiscal >stimulus. By our forecasts, Germany, France, and Italy could all >violate this constraint during the next year. In large part, this >outcome is a painful legacy of several years of fiscal lenience >that preceded this year's slowdown. But it also reflects a >potentially fatal flaw in the Stability Pact itself: Rather than >seek to achieve a target of budgetary balance at "full >employment," fiscal targets are not adjusted for the ups and >downs of the business cycle. By Eric Chaney's reckoning, Euroland >may well have to impose outright fiscal retrenchment in order to >hit the 3% deficit target (see his 3 September dispatch, "The >Arithmetic and Politics of Fiscal Policy"). In economists' >jargon, that's tantamount to a "pro-cyclical" policy stance -- a >policy thrust that, in this case, actually reinforces the >downside of the euro-zone growth cycle. > >A similar case can be made for the monetary policy stance of the >European Central Bank. With backward-looking European inflation >hitting 2.1% in August -- violating the upper limit of the ECB's >0-2% definition of price stability -- Joachim Fels believes that >any monetary easing is all but out of the question over the next >several months. That leaves the central bank in a very tough >place -- unwilling and/or unable to adapt a counter-cyclical >policy stance in an increasingly shaky growth climate. In my >view, the increasing threat of global deflation suggests that the >ECB needs to be more forward-looking and anticipatory in setting >its inflation target. If it were to do so and come to the >conclusion that the balance of risks on the price front has >shifted from inflation to deflation, then it would be better able >to break the shackles of its pro-cyclical policy stance. The >chances of that are slim, or next to none, in our view. Hence, >with both levers of stabilization policies -- fiscal and >monetary -- decidedly anti-growth as cyclical deterioration now >intensifies in the real economy, the possibility of a euro-zone >double dip is suddenly very real. > >Euro-politics is the third flaw to get unmasked this summer. This >is the least surprising of the three setbacks. Political risk has >long been perceived as the Achilles' heel of EMU. Unfortunately, >there have been numerous recent examples of politically inspired >setbacks on the road to reform that threaten Euroland >productivity and its long-term potential growth rate. The most >recent, of course, was German Chancellor Gerhard Schroeder's >election-eve bailout of MobilCom -- a job-saving ploy that, in my >opinion, can only perpetuate the capacity excesses that Germany >and Europe need to rationalize. The same can be said with respect >to state-sponsored support of France Telecom. Meanwhile, German >labor unions have just warned of major work disruptions in the >event of a victory by conservative Edmund Stoiber. At the same >time, the electorates in Germany, France, and Italy have all cast >their most recent votes in favor of large-scale tax cuts -- >actions that would only deepen Europe's fiscal conundrum. And, >for the sake of the Stability Pact, Germany recently postponed >tax cuts in order to fund its flood emergency program. Taken to >its limit, the risk is that these political tensions could boil >over into a more serious anti-Maastricht backlash that could >shake the very foundations of EMU. I doubt if that's the endgame, >but the odds of such a tailspin are undoubtedly higher today than >they were a year ago. > >All this is a lethal combination for Europe. The lack of domestic >demand leaves the region's destiny in the hands of others -- in >effect, a captive of a US-led global trade cycle. If I'm right >and a post-bubble US economy remains dip-prone for some time to >come, Europe's externally led growth dynamic is a recipe for >trouble. Nor can counter-cyclical stabilization policies be >counted on to fill the void. Both monetary and fiscal policy >settings are aimed in decidedly anti-growth directions. So, too, >is the euro. Although currency appreciation has stalled recently, >the euro has still appreciated about 10% versus the dollar over >the course of this year. As if that's not enough, anti-reform >politics are in the ascendant in this election season -- hardly >surprising in an economic climate of cyclical distress. > >Suddenly, Europe looks like one of the weakest links in the >global growth chain. In my view, that's one of the biggest >surprises to emerge in this summer's global slowdown. For former >Euro-skeptics like myself, this is a huge disappointment. Like >many, I had become hopeful that EMU was the answer to >Eurosclerosis. Those hopes may now be drawn into serious >question. Over the past couple of weeks, Byron Wien and I met >with about 1,500 European investors. They were as despondent a >lot as I have ever seen. They've given up on the idea that Europe >can shape its own destiny. Their only hope is that a US-led >cyclical revival jump-starts an externally driven Euroland >economy. Needless to say, I didn't offer much encouragement on >that count. > >Article at: >http://www.morganstanley.com/GEFdata/digests/20020920-fri.html
