Fainting in Coyles An occasional letter from the
Heart of Euroville
Friday, October 03, 2003
Europe spins wildly
Ok so one day you happen across a story that is headlined thus... Euro zone could outstrip US by 2010. EU Observer, for it is they, are normally staright news providers, funded as they are by the Eurosceptic Europe of Democracies and Diversities Group in the European Parliament. In fact the boss of EUObs is married to Jens Peter Bonde MEP the stalwart Danish socialist anti-europe campaigner and founder ofthe June Movement. So I thought maybe there was something in it.
The story was sourced to an Irish paper, the Irish Examiner, It produced a headline Eurozone ‘shows recovery signs’ . But take a look at the evidence provided and it just isn't there. The recovery signs are, "good news from the US, Japan and the Asian markets are expected to help Europe's economy" and the terrific "Based on the mid-range values, the average growth rate should be around 0.5% for 2003 as a whole". Sounds rather unimpressive doesn't it.
Back to the EU Obs piece. They also sourced PWC's European Economic Outlook forcast for October. In this paper four possible scenarios are played out.
1 - Prosperous Partners scenario In this a benign macroeconomic outlook for the US, associated with a soft landing for consumer spending and rising exports and investment, is combined with a benign microeconomic scenario for Euroland, with rapid progress in both labour market and pension reform. In this case, both the US and Euroland might hope for an acceleration in trend growth, with overall GDP growth remaining somewhat higher in the US, but some longer-term catch-up by Euroland in terms of per capita GDP as the potential benefits of structural reforms are realised. - or in other words The US pulls the EU up, as long as the EU reforms itself (Ha ha)
2 -America First scenario The US consumer achieves a soft landing and the country retains its economic, geopolitical and technological leadership, while the major Euroland economies fail to make any significant progress on their structural reform agendas. In this scenario, performance across the EU economies is likely to vary significantly depending on how far each country is able to emulate the US model and attract inward investment on this basis. At present, the UK, Ireland and several of the new EU accession countries would seem best placed to succeed in such a scenario, but the larger Euroland economies might continue to see their GDP per capita levels decline relative to the US in this case. America is all right but Europe fails to take advantage of the situation due to its generic sclerosis - barring the UK, Ireland and the Baltic States.
3 -Europe Reborn scenario In which a reformed EU with a declining structural unemployment rate does achieve significant catch-up with a cyclically unstable US economy, is one possible version of how this might unfold in practice. In this case, the US would suffer from a sharp deceleration in domestic demand growth over the next few years as the government is forced to raise taxes and cut public spending in order to reduce a budget deficit that threatens to spiral out of control. Europe rises only in relative terms due to economic disastor in the US, but would be unable to capatalise due to lack of reform and declining markets.
4 -Double Deflation scenario In which both the US and the EU find themselves dragged down into Japanese-style deflation and stagnation over the next few years. This is the result of an assumed combination of the bursting of the household debt-driven residential property boom in the US (and indeed the UK) and a banking crisis in Germany that has knock-on effects across its European trading partners and effectively stalls progress on structural reforms in Euroland. An outright disastor for all concerned, Europe gets thumped hardest again.
In summary, there is no guarantee that the EU economy will catch up with the US over the period to 2010, but the potential is there to start making progress towards this objective through a combination of a relatively relaxed, pro-growth macroeconomic policy stance, and steady and determined progress on labour market and pension reform in particular. Or in other words that headline on the EU Obs site is complete hokum, relying on impossible objectives therefore not worth the electronic paper it is published upon. No doubt the European Central Bank and Pedro - sorry I don't know what you are talking about, I dion't know there were mice in the Kitchen and even if I did I am not a cat - Solbes the European Commissioner for economic collapse will tell us that Europe will overtake America sometime soon.