Saturday, May 21, 2005

One size definitely does not fit all

Among all the articles full of surprise that the people of France and the Netherlands appear to be more cussed than the “traditionally eurosceptic” British, the International Herald Tribune also had one on the economic aspects of the European “experiment.

(That expression reminds me of an old Communist joke about some chap asking at a party meeting whether it was true that Marx and Engels were doctors. Yes, he is told, though, they had PhDs. Well, says the questioner unabashed, why did they not experiment on animals first? I suppose nowadays the animal rights brigade would be up in arms if all these political “experiments” were inflicted on our four-legged friends first.)

Mark Landler of the New York Times looked at the situation in Spain, where the economy or, at least, the housing market is seriously over-heating. (While unemployment remains very high, though Mr Landler did not seem to notice that.)

Mr Landler makes it clear that he thinks the eurozone is a good idea, but he is, nevertheless, bemused with what is happening:
“Nearly two decades after joining the European Union, Spain is on the leading edge of an emerging, and troubling, dichotomy between dynamic European countries with fast-rising asset prices, and lumbering countries with moribund markets,most notably Germany. Far from converging into a more homogeneous bloc, the 12 countries that use the euro are dispersing into sprinters and laggards, with different levels of consumer confidence, industrial activity, and economic vigor. Bustling Ireland, with a growth rate of 5 percent, has little in common with becalmed Italy, where output may shrink this year.

“This has created a conundrum for the European Central Bank in Frankfurt, which sets interest rates for much of the Continent. For months, the bank has signaled it wants to lift rates. But it is afraid of hobbling weak countries like Germany and the Netherlands.

While the Germans linger on the edge of a recession, Spaniards are taking out cut-rate mortgages to buy and build houses at a furious pace.”
There are many reasons for the rapid rise in housing prices, the most rapid since the mid-1980s of any large country in the world, according to Michael Ball, author of an annual survey of the European housing market published by the Royal Institution of Chartered Surveyors in London.

One of the biggest one, however, is the interest rate set by the European Central Bank. Spain, it is considered, could easily absorb a higher rate than 2 per cent.
“Germany is the polar opposite. With an unemployment rate of 11.8 percent and growth of less than 1 percent, prices have been flat or even falling in recent years. Foreign investors are buying German property because it is viewed as a bargain. On the other hand, housing prices are rising at double-digit rates in Ireland and France. "Housing-price inflation is the first indication of a monetary policy that is too expansionary," said Jörg Krämer, the chief economist of HVB Group in Munich. "If we get a bubble, there is a high risk it will burst."”
Mark Landler provides no answer. He merely notes the, to him rather strange, phenomenon of the euro not bringing the European economies together or even closer to each other.

Meanwhile, just down the road, Italy has gone into a “technical” recession. In other words, its GDP has fallen for the second quarter running. According to the Corriere della Sera:
“There was a 0.5% drop between January and March in comparison with the previous quarter, and the year-on-year trend has plummeted from +0.8% at the end of 2004 to -0.2%. Again according to data released yesterday by the ISTAT statistics institute, industrial output fell in March by 5.2% on an annual basis.”
That’s pretty bad, you might say, but then you are not Silvio Berlusconi, who simply refuses to acknowledge that this is a recession, though he did admit that the situation is not one to encourage optimism.
“Italian domestic consumption is languishing and exports are falling. In the first quarter, all the key Italian economic sectors continued to suffer. In March, textile production fell by 11% on an annual basis, and footwear was down 16.6%. Furniture production had contracted by 8.1%, and output of motor vehicles fell by 9.8%. What is worse, the situation is unlikely to improve in the short term. ISAE (Institute for Studies and Economic Analysis) experts forecast “only weak signs of improvement”.”
The worst is yet to come, I fear. The European Commission has decided that the time has come to act on the Italian situation, where the problems are now being described as “structural” not contingent.
“In the light of the new data, the E.U. Commission is stepping up the pace of its inquiry into Italy’s accounts as it prepares to propose infringement procedures in June.”
Should the infringement procedures go through, what will they propose as remedy? A huge fine? That should set the economy up, I do not doubt. Then again, Italy is unlikely to pay it.

No comments:

Post a Comment