A basic link between the U.S. and West European economies may be breaking. There has been little comment on this, but it is very important because it could introduce a factor of stability into the world economy that didn’t exist before.
In the past, if the U.S. economy slowed sharply, as it has done in recent weeks, the world economy followed in step. For 50 years, the cliche ruled: If America sneezed, Europe (with the rest of the world) caught a cold. Thus, the dollar fell, and European currencies were threatened. But Jean-Claude Trichet, governor of the Banque de France, said at the end of last week: Now, that’s finished.
What has happened in the U.S. stock markets and the U.S. retail economy has caused many to think that an end to the long boom is arriving. A strong rally in technology stocks late last month failed to convince analysts that those stocks were back, or to restore faith in the so-called new economy. Initial trading after Christmas confirmed this skepticism.
Market events and the U.S. deficit had already caused some investors and economists to ask whether there ever really was a new economy. U.S. profit warnings have proliferated, and consumer confidence has dropped. The Christmas retail economy is estimated to have been the worst in a decade.
The wonderful vision of an economic society fundamentally, and even unimaginably, transformed by technology and the Internet no longer convinces. John Makin of the American Enterprise Institute argues that the United States has probably already entered a recession and is on a dynamically unstable downward path.
However a slump in the United States–if it does arrive–could confirm a liberation of the European economy. The conventional assumption has been that a halt to the American boom would, as in the past, provoke the same consequences abroad. London’s Financial Times commented that Britain would suffer badly from a U.S. economic turndown, and German business confidence indices have declined because of concern about the U.S. situation. The economic press has made much of the “hard landing versus soft landing” question.
Nevertheless, the European economies are holding up. The euro, the European currency, though battered by opinion and discounted by the traders throughout the year, soared on the last trading day before the Christmas hiatus. Trading in the euro was exceptionally active, moving it above $0.92 for the first time since August. A new confidence in the euro seemed apparent in the derivatives markets. The Bank of America forecast the euro’s return to dollar parity within six months.
Growth rate forecasts for Europe remain relatively strong, even for Britain, which is outside the euro zone with a probably overvalued currency. The average of British growth forecasts for the coming year is 2.6 percent, down from 3 percent this year. However, the 11 euroland economies are expected to grow by more than 3 percent next year, a rate that is higher, for the first time in a decade, than that forecast for the United States.
The German economy is in excellent shape. Unemployment has been falling for the past eight months, to the lowest seasonally adjusted figure in five years. Confidence in France also remains high, with strong Christmas sales. Household consumption of furniture, electronic goods and appliances surged in November. And unemployment there has fallen even more than in Germany. These are reversible trends. But if they are confirmed, the two largest economies in the world, the American and the European Unions, would simultaneously be moving in different directions, sustained by economic forces and developments proper to each.
The U.S. remains the leading world economy, in terms of influence and, until now, in growth. But the EU economies may have reached a critical mass, convergence and level of policy coordination that would de-link them in a decisive way from U.S. economic developments.
The explanation for this emergent autonomy of the European economy would appear to be the creation and coming of age of the common currency, the euro. Before monetary union, European exchange and interest-rate policies were largely dictated by the defense of relatively weak currencies. This usually meant maintaining national interest rates at levels that depressed overall European domestic activity and growth. The EU countries’ economic policies were indirectly determined by reaction to U.S. policy on the dollar, formulated with reference to U.S., not European, conditions.
A pluralism of economic power has been on the way to restoration since the Europeans established their single market in 1992. Its achievement would mean that the world economy has two strong and autonomous supports, and that now seems nearer than ever before.
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E-mail: wpfaff@easynet.fr
