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The Economist
The ECB will definitely get blamed if this turns worse. I'm pretty sure it will regardless of the other lower interest rates.
Interest rates in Asia are falling, as economies struggle with recession and the after-effects of the SARS crisis. But Europe’s central bankers are resisting the rush to cheaper money
WHAT do Britain, South Korea, Singapore and Indonesia have in common? Perhaps not that much. But on Thursday July 10th, all four countries cut interest rates as part of the effort to stimulate economic activity. The decision taken in London had been a close call, with opinion divided before the anouncement on whether the Bank of England would cut. The three Asian economies joined a growing list of countries in the region that have reduced interest rates in recent weeks. The monetary authorities in Hong Kong, the Philippines, Thailand, and Taiwan have already followed the example set by America’s Federal Reserve on June 25th. But the European Central Bank (ECB) decided against any change in rates at its monthly meeting, also on Thursday of this week. The ECB cut rates in June: that, apparently, is enough for now.
The monetary loosening in Britain and Asia only underlines the extent to which the ECB is now out of step. Singapore and South Korea acted after confirmation that their economies had slipped into recession this year. In both countries, the authorities think the worst is over and that growth will pick up during the second half of the year. But in the wake of the SARS crisis, and the general downturn in tourism following increased fears about terrorist attacks, governments in Asia are keen to restore economic confidence.
The Asian Development Bank publishes economic information for the region. The Asia Recovery Information Centre monitors news affecting the Asian economic recovery. See also the Association of South-East Asian Nations and the World Bank's East Asia section. The Bank of England, the European Central Bank and the Federal Reserve post monetary-policy information. The US Treasury Department, the Department of Labour and the Department of Commerce provide economic information and statistics. The EU's economic and financial affairs directorate posts the “stability and growth pact”, provides economic statistics and publishes a recent report on fiscal policy and budgetary imbalances in EU countries. The DIW posts some English-language economic information, and publishes its latest report in German.
Cheaper money has certainly worked in America, according to John Snow, President George Bush’s treasury secretary. In an interview published on Thursday, Mr Snow said a combination of lower interest rates and the programme of tax cuts pushed through by Mr Bush has put the economy on a path to faster growth. Mr Snow expects the economy to expand at an annual rate of 3% in the second half of this year. That might be a touch on the optimistic side—the signals about America’s economic performance continue to be mixed, with unemployment currently at the highest level for nine years.
But even the cautious Alan Greenspan, chairman of the Fed and principal architect of America’s cheap-money policy, has conceded that Mr Bush’s tax cuts have come at a fortuitous time for the economy. Nearly two years after the recession ended, American growth is still relatively sluggish. The uncertain nature of the recovery, coupled with fears about deflation, prompted last month’s rate cut, the 13th since January 2001.
America’s problems pale in comparison with those in Europe, though. The German economy is already technically in recession. Only last week, one of the leading German think-tanks, the DIW, predicted that the economy—Europe’s largest—would shrink during 2003. It said there was little prospect of a significant upturn next year. Yet the ECB’s decision to resist further interest-rate cuts this month was well-trailed. When Wim Duisenberg, the ECB president, addressed the European Parliament last week, he said that the ECB had done its part by reducing borrowing costs in June. Now, he argued, it was up to European governments to do their bit.
Mr Duisenberg does have a point. European governments have postponed much-needed economic reforms. The German government has, belatedly, embarked on a programme of reforms aimed at curbing the excesses of the welfare state. But such changes take a long time to implement, and even longer to have any impact. Germany desperately needs short-term stimulus. Chancellor Gerhard Schröder has decided to bring forward income-tax cuts to Janaury next year—though he has been vague, as yet, on how these will be financed. His government has little room for maneouvre because of the need to bring Germany back within the limits of the euro area’s stability pact, which requires governments to curb borrowing.
So it all comes back to interest rates and the ECB. Some economists suspect that the bank will cut rates again after the summer, but the ECB is building a reputation for doing too little, too late. If, as currently seems likely, Germany remains stuck in the economic doldrums and if, as is quite possible, that has a damaging impact on the rest of Europe, the ECB could find itself getting the blame.
WHAT do Britain, South Korea, Singapore and Indonesia have in common? Perhaps not that much. But on Thursday July 10th, all four countries cut interest rates as part of the effort to stimulate economic activity. The decision taken in London had been a close call, with opinion divided before the anouncement on whether the Bank of England would cut. The three Asian economies joined a growing list of countries in the region that have reduced interest rates in recent weeks. The monetary authorities in Hong Kong, the Philippines, Thailand, and Taiwan have already followed the example set by America’s Federal Reserve on June 25th. But the European Central Bank (ECB) decided against any change in rates at its monthly meeting, also on Thursday of this week. The ECB cut rates in June: that, apparently, is enough for now.
The monetary loosening in Britain and Asia only underlines the extent to which the ECB is now out of step. Singapore and South Korea acted after confirmation that their economies had slipped into recession this year. In both countries, the authorities think the worst is over and that growth will pick up during the second half of the year. But in the wake of the SARS crisis, and the general downturn in tourism following increased fears about terrorist attacks, governments in Asia are keen to restore economic confidence.
The Asian Development Bank publishes economic information for the region. The Asia Recovery Information Centre monitors news affecting the Asian economic recovery. See also the Association of South-East Asian Nations and the World Bank's East Asia section. The Bank of England, the European Central Bank and the Federal Reserve post monetary-policy information. The US Treasury Department, the Department of Labour and the Department of Commerce provide economic information and statistics. The EU's economic and financial affairs directorate posts the “stability and growth pact”, provides economic statistics and publishes a recent report on fiscal policy and budgetary imbalances in EU countries. The DIW posts some English-language economic information, and publishes its latest report in German.
Cheaper money has certainly worked in America, according to John Snow, President George Bush’s treasury secretary. In an interview published on Thursday, Mr Snow said a combination of lower interest rates and the programme of tax cuts pushed through by Mr Bush has put the economy on a path to faster growth. Mr Snow expects the economy to expand at an annual rate of 3% in the second half of this year. That might be a touch on the optimistic side—the signals about America’s economic performance continue to be mixed, with unemployment currently at the highest level for nine years.
But even the cautious Alan Greenspan, chairman of the Fed and principal architect of America’s cheap-money policy, has conceded that Mr Bush’s tax cuts have come at a fortuitous time for the economy. Nearly two years after the recession ended, American growth is still relatively sluggish. The uncertain nature of the recovery, coupled with fears about deflation, prompted last month’s rate cut, the 13th since January 2001.
America’s problems pale in comparison with those in Europe, though. The German economy is already technically in recession. Only last week, one of the leading German think-tanks, the DIW, predicted that the economy—Europe’s largest—would shrink during 2003. It said there was little prospect of a significant upturn next year. Yet the ECB’s decision to resist further interest-rate cuts this month was well-trailed. When Wim Duisenberg, the ECB president, addressed the European Parliament last week, he said that the ECB had done its part by reducing borrowing costs in June. Now, he argued, it was up to European governments to do their bit.
Mr Duisenberg does have a point. European governments have postponed much-needed economic reforms. The German government has, belatedly, embarked on a programme of reforms aimed at curbing the excesses of the welfare state. But such changes take a long time to implement, and even longer to have any impact. Germany desperately needs short-term stimulus. Chancellor Gerhard Schröder has decided to bring forward income-tax cuts to Janaury next year—though he has been vague, as yet, on how these will be financed. His government has little room for maneouvre because of the need to bring Germany back within the limits of the euro area’s stability pact, which requires governments to curb borrowing.
So it all comes back to interest rates and the ECB. Some economists suspect that the bank will cut rates again after the summer, but the ECB is building a reputation for doing too little, too late. If, as currently seems likely, Germany remains stuck in the economic doldrums and if, as is quite possible, that has a damaging impact on the rest of Europe, the ECB could find itself getting the blame.
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