Can Europe's economy stay on track even if the US goes off the rails?
This old question is being asked with new urgency across the continent, after a startling divergence this week in how the European Central Bank (ECB) and the Federal Reserve are reading economic tea leaves.
Federal Reserve Chairman Ben Bernanke signaled on Thursday that the Fed would cut rates to try to ward off a recession. Earlier that day, European Central Bank President Jean-Claude Trichet told a news conference in Frankfurt, Germany, that the signals on European growth were mixed.
A growing number of economists, convinced that Europe is not as insulated from the US' woes as many Europeans would like to believe, are questioning why, at such a sensitive moment, the ECB is warning it might raise interest rates.
"The ECB sees the glass as half full; the Fed sees it as half empty," said Thomas Mayer, the chief European economist at Deutsche Bank. "It's not a difference in the data; it's a difference in the analysis."
The simplest explanation for the ECB's hawkish demeanor is its inflation-fighting mandate.
Trichet, for example, has warned labor unions not to use Europe's inflation rate of 3.1 percent as a pretext for demanding steep wage increases.
But while Trichet has thrust himself into German labor negotiations, several economists argue that the bank is underestimating the impact in Europe of a recession in the US.
The bank, Mayer said, still does not believe that the credit crisis originating in the US mortgage market poses a grave risk to Europe's economic prospects. That, he said, is why the bank is threatening a rate increase when it should be preparing for a rate cut.
Disputing another train of thought popular in Europe, Jacques Cailloux, head of euro area economic research for the Royal Bank of Scotland, said: "The ECB is wrong in its assessment that the emerging markets can offset the US downturn."
He added: "The whole idea of globalization is at odds with the thesis of decoupling."
Decoupling refers to the argument that Europe is not as dependent on the US as it once was because Europe's exports to China and other emerging economies have grown so much faster than its exports to the US.
The thesis became fashionable in the last year as an explanation for the growth rate in the US slowing as big European economies accelerated.
In its World Economic Outlook last spring, the IMF suggested that the faltering US economy had limited impact on world growth because economic fragility in the US was rooted in a troubled housing market -- a national phenomenon that was less subject to global contagion.
The chapter was titled "Decoupling the Train," but the authors put a question mark after the title, cautioning that housing woes could spill into other areas of the US economy, in which case they could become the world's troubles.
This is so because the mortgage problems have mutated into a credit crisis that crossed the Atlantic. European banks, like their US counterparts, have been forced to write down billions of dollars in the value of complex securities backed by subprime mortgages.
The ECB responded as forcefully as any central bank to the turmoil caused by the credit crunch. This week, it said it would inject another US$20 billion into the financial system, the latest in a stream of liquidity injections since August.
But Trichet has stopped short of saying that the financial crisis could halt European growth. At his news conference on Thursday, after the bank left its benchmark rate unchanged at 4 percent, he said the signals on Europe were mixed.
"Our baseline scenario remains one of ongoing growth, but risks are clearly on the downside," he said.
For Mayer and other economists, the question is not whether the credit crisis will dent Europe's economy, but when. Housing sales in Spain and Ireland -- two of Europe's hottest property markets -- have already dried up, he said, and France will not be far behind.
"Europe suffers from the same problems as the US does," Mayer said. "The trade linkages between Europe and the US may have come down in recent years, but that is beside the point."
Cailloux of Royal Bank of Scotland said there was even a correlation between Germany's exports to China and its exports to the US.
As China exports less to the US, Cailloux said, it has less demand for German exports, like machine tools.
"Europe's exports to Asia are indirectly related to final demand in the US," he said.
This coupling will soon become apparent to the ECB, Cailloux predicted. The bank's next shift in monetary policy, he said, would be a rate cut, not a rate increase.
There is much evidence that the Chinese Communist Party (CCP) is sending soldiers from the People’s Liberation Army (PLA) to support Russia’s invasion of Ukraine — and is learning lessons for a future war against Taiwan. Until now, the CCP has claimed that they have not sent PLA personnel to support Russian aggression. On 18 April, Ukrainian President Volodymyr Zelinskiy announced that the CCP is supplying war supplies such as gunpowder, artillery, and weapons subcomponents to Russia. When Zelinskiy announced on 9 April that the Ukrainian Army had captured two Chinese nationals fighting with Russians on the front line with details
On a quiet lane in Taipei’s central Daan District (大安), an otherwise unremarkable high-rise is marked by a police guard and a tawdry A4 printout from the Ministry of Foreign Affairs indicating an “embassy area.” Keen observers would see the emblem of the Holy See, one of Taiwan’s 12 so-called “diplomatic allies.” Unlike Taipei’s other embassies and quasi-consulates, no national flag flies there, nor is there a plaque indicating what country’s embassy this is. Visitors hoping to sign a condolence book for the late Pope Francis would instead have to visit the Italian Trade Office, adjacent to Taipei 101. The death of
The Chinese Nationalist Party (KMT), joined by the Taiwan People’s Party (TPP), held a protest on Saturday on Ketagalan Boulevard in Taipei. They were essentially standing for the Chinese Communist Party (CCP), which is anxious about the mass recall campaign against KMT legislators. President William Lai (賴清德) said that if the opposition parties truly wanted to fight dictatorship, they should do so in Tiananmen Square — and at the very least, refrain from groveling to Chinese officials during their visits to China, alluding to meetings between KMT members and Chinese authorities. Now that China has been defined as a foreign hostile force,
On April 19, former president Chen Shui-bian (陳水扁) gave a public speech, his first in about 17 years. During the address at the Ketagalan Institute in Taipei, Chen’s words were vague and his tone was sour. He said that democracy should not be used as an echo chamber for a single politician, that people must be tolerant of other views, that the president should not act as a dictator and that the judiciary should not get involved in politics. He then went on to say that others with different opinions should not be criticized as “XX fellow travelers,” in reference to
RSS