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prophet of God
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Registered: 09/05/04
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Group Says Europe Is Lagging in Global Recovery
    #3433671 - 12/01/04 06:22 PM (11 years, 10 months ago)

Group Says Europe Is Lagging in Global Recovery

(written by Mark Landler on The New York Times of Wednesday May 12th 2004)

PARIS , May 11 ? The United States and Asia are leaving Europe behind in an accelerating, but uneven global economic recovery. That was the assessment of the Organization for Economic Cooperation and Development when it released its semi annual outlook at its headquarters here on Tuesday.

The organization raised its growth forecast for the United States , while cutting its outlook for Germany and Italy . It prescribed opposite remedies to help narrow the economic divide: an increase in interest rates by Federal Reserve and a cut by the European Central Bank.

? Asia and North America are racing ahead, but Germany and Italy are struggling to revive their economies?, said Jean-Philippe Cotis, the chief economist of the O.E.C.D., an organization of 30 countries.

This disparity, which has been deepened by economic policies on both sides of the Atlantic , could threaten Europe and Japan with further spikes in the exchange rates of their currencies versus the dollar.

?You could have a turbulent exchange rate adjustment?, he said in an interview. ?That would hurt Japan and Europe ?.

A declining dollar could stoke inflation in the United States , Mr. Cotis said, which would prompt the Fed to embark on a long-expected tightening of monetary policy. That step could be jarring, he warned, if the White House does not scale back its spending and tackle the deficits.

Still, the troubles in the American economy pale beside those in Europe , which fell harder, and is recovering more slowly than any other major economic block.

The O.E.C.D. predicts that the twelve nation Euro zone will grove just 1.6 percent this year compared with 4.7 percent in the United States . Japan , once the economic sick man of the world, is projected to grow 3 percent, nearly double Europe ?s pace. Germany , where consumers remain in near paralysis, is expected to grow only 1.1 percent in 2004. Italy , which has suffered from an eroding competitiveness of its exports, may grow just 0.9 percent.

The most humbling fact for Europeans is that so far, their woes have had little effect on the global economy, in part because Asia has grown in importance as a trading partner for the United States .

?Being a French man and European it hurts me to say it, but it is true: Europe is not indispensable to this recovery?, Mr. Cotis said.

There was fresh evidence of Europe ?s struggles at the meeting of finance ministers in Brussels on Monday. The German finance minister, Hans Eichel, warned the European Commission that Berlin might not fulfill its promise to pull its budget deficit below 3 percent of its gross domestic product by 2005, as mandated by the Maastricht Treaty, which created the monetary union.

Germany , which has breached the deficit cap for three consecutive years, said it could not risk having spending cuts choke off a recovery. The government has also been hit with an unexpected shortfall in tax revenues, prompting a new spate of rumors in Berlin that Mr. Eichel may be replaced.

?The recovery is there?, he said,? but it?s not so robust that we can already touch the brakes. We first need firm ground under our feet.?

Italy , which is also on track to violate the deficit limit in 2004, avoided being issued a warning letter by the commission. The Italian economics minister, Giulio Tremonti, promised to stem the tide of red link, winning the backing if his beleaguered colleague, Mr. Eichel.

Europe ?s torpid growth has prompted a debate about whether the Continent should adopt looser fiscal policies, like those in the United States and Britain , whatever the strictures of the European Union.

But Mr. Cotis said Germany , Italy and other countries had less flexibility to increase spending because they have not made changes to their pension systems and other social programs. Their aging populations, he added, would soon place an even heavier burden on public finances.

The European Central Bank, Mr. Cotis said, could relieve some of the pressure by lowering interest rates half a point.

In many ways, Europe was the gloomy exception in the O.E.C.D. report. Mr. Cotis said the recovery in the United States and Asia was "strong and sustainable." Early fears that the rebound was not generating new jobs in the United States no longer seem warranted, he said.

Mr. Cotis took issue with two popular themes in recent economic analysis: that moving jobs to low-wage countries is to blame for the weak job environment in the United States , and that China is overheating.

"Outsourcing may be a good scapegoat," he said, "but it doesn't explain why job creation has been below expectations." He said that moving jobs offshore was a "smallish" phenomenon, and that the weakness in the job market reflected corporate retrenchment after the buoyant 1990's.

China 's economy, he acknowledged, is "close to overheating." But he believes that the Chinese leaders have averted the worst danger by moving quickly to tighten credit. "You don't have an explosion of inflation there," Mr. Cotis said. "They didn't let it get to that point before they acted."

Japan and South Korea , meanwhile, have hugely benefited from the breakneck growth in China because China has been a major buyer of Japanese and Korean machinery, as well as a prolific exporter.

The wild card in the O.E.C.D.'s forecast is rising oil prices. If recent high prices persist, Mr. Cotis said, it would cut his global growth projections by 0.2 percentage point. Still, he counseled calm. "There has been quite a bit of overreaction to the recent moves in oil prices," he said.


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