- The Washington Times - Thursday, May 29, 2003

Who says the green-eyeshade brigade doesn’t have a sense of humor? In final preparation for the annual Group of Eight (G-8) economic summit that begins this weekend in Evian, France, G-8 finance ministers met in Deauville, France, two weeks ago. In the first line of their May 17 formal statement, the ministers asserted that “major downside [economic] risks have receded.” The next day, the International Monetary Fund issued an extraordinary report warning that Germany, the erstwhile locomotive of the formerly expanding eurozone economy, faced a high risk of falling into the same kind of deflationary spiral that has tormented Japan for nearly four years.

Since the finance ministers issued their statement, the euro’s rapid appreciation has significantly intensified those deflationary pressures. Meanwhile, the European Central Bank (ECB) continues to fiddle as Germany’s deflationary fires threaten to spread throughout much of the eurozone area. Worsening Germany’s recent return to recession and the eurozone’s general economic stagnation is the area’s so-called “growth and stability pact.” The fiscal restrictions in this pact have been forcing Germany and other European nations to adopt contractionary fiscal policies (i.e., tax increases) in order to reduce their budget deficits, which have increased mostly due to cyclical factors. The pact is prescribing the wrong medicine at the wrong time.

“[M]ajor downside risks have receded”? Germany is in recession; Japan is on the verge of yet another recession; and the U.S. economy has been expanding at an annual rate of less than 2 percent during the past two quarters, while probably growing even more slowly during the current quarter. In other words, for the first time in nearly three decades, the global economy faces the dangerous prospect of the world’s three largest economies simultaneously experiencing downturns. If that is not a “downside risk,” what is?

Instead of complaining about America’s timely fiscal expansion through tax relief, the Europeans ought to follow suit, even if it means revising their growth and stability pact.

In recent years, European (and Japanese) finance ministers have been complaining about the unsustainability of America’s burgeoning trade deficit, which now totals an admittedly hefty 5 percent of gross domestic product. The flip side of their complaint, of course, has been the fact that their economies would have grown far more slowly (or contracted more steeply) in the absence of their trade surpluses with America. However, now that the euro, which depreciated sharply after its January 1999 inauguration, has returned to its original level, Europeans have been whining. Today’s complaints stem from the facts that their exports have become relatively more expensive, imports from America are becoming less expensive, and the euro’s appreciation has intensified deflationary pressures throughout Europe. To moderate the euro’s strength, the obvious policy action is for the independent ECB to lower short-term interest rates by as much as a full percentage point.

U.S.-European trade relations have reached their lowest point in years; agricultural subsidies are a major sticking point. There’s enough blame to go around; but, clearly, European agricultural policies are far more detrimental to developing nations than America’s, which U.S. negotiators have offered to overhaul — only to be stiff-armed by Europe. To complement America’s policy initiatives, European policy-makers need to pursue monetary expansion; stop forcing contractive fiscal policies; enact desperately needed regulatory reform; and begin to reform their farm policies. Action would speak even louder than the howls elicited by green-eyeshade humor.

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