April 17, 2005
Why Europe stays poor (again)
The latest issue of The Economist has an editorial on the state of the world economy, presumably timed to elicit some action from the International Monetary Fund and World Bank, which are holding their spring meeting in Washington, D.C. Leaving aside the futility of the magazine’s gesture, the paid-subscription article does make some smart points about the major threats to the world economy right now:
Thus far, however, there seems little reason to panic. Indeed, in 2004 global output grew at over 5%, its fastest pace in a generation. In its latest World Economic Outlook, released on April 13th, the IMF forecasts growth of 4.3% in world output for 2005, slower than last year but still above trend. The new oil shock has neither had a dramatic effect on inflation expectations nor precipitated a dangerous wage-price spiral, even though global monetary conditions remain extraordinarily loose. All this could change if the oil price stays at its current levels for long or rises yet further. At some point, higher oil prices will bite hard. But, for now, the oil price is not the world's most pressing economic problem.
That distinction goes to the imbalanced nature of the global economy. The world as a whole may be growing pretty robustly, but the aggregate growth rates mask a big and growing divergence between places that are booming and those that are lagging behind. America and China lead the boomers: in both cases growth has consistently been stronger than expected. Continental Europe and Japan, in contrast, are falling ever further back. Japan's recovery stalled in the second half of 2004 and there are only modest signs of a turnaround. The IMF's economists expect Japan's GDP growth to be a mere 0.8% in 2005. The outlook for the euro zone's big economies is similarly bleak, with unemployment high and domestic demand low. Like most other economists, the IMF's number crunchers have scaled back their euro-zone growth projections to a mere 1.6% for this year.
More grist for the mill for those of us who always thought that the European Union—and in particular the economic straitjacket of the euro—was a world-class Dumb Idea.
Unfortunately, the U.S. loses out too, since its consumers are just about the only ones consuming—reluctantly—these days (OK, slight exaggeration, but bear with me here). America’s yawning current-account deficit is accelerating fast (it's currently running at more than $2 billion a day) and is set to end the year at close to 7% of GDP (see The Economist’s sobering chart). So much for the deficit-curbing power of a depreciating currency.
There seems very little willingness to do anything about all this. American politicians have shown more concern about Terri Schiavo than they have about the deficit. And the odds of economic reform in Europe are on a par with the College of Cardinals electing a Presbyterian pope.
UPDATE: Jane Galt over at Asymmetrical Information has an excellent post on these issues.
Posted by Stephen at 2:19 PM in Economics | Permalink | TrackBack (0)
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