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Wednesday, May 21, 2003

Fine Words or Empty Rhetoric?

The Economist muses on the state of the global economy and, for once, comes to the right conclusion (well nearly, since recently they seem to have an almost pathological inhibition against spelling anything out clearly). I am one of those who hankers back to the 'good old days', which maybe were never really so good, but were probably a damn site better than what we seem to have waiting round the corner. This euro run cannot hold: got that, cannot hold.

For those who have long predicted the dollar’s collapse, the recent currency-market volatility must seem like vindication. America’s current-account deficit is now more than 5% of GDP, and few economists believe that the capital inflows needed to finance such a large deficit are sustainable. A weaker dollar is a key element in the adjustment needed to bring that deficit down.

But if Mr Snow and his colleagues are relaxed about the dollar’s drop—even if they claim not to be trying to engineer it deliberately—the consequences elsewhere in the world are potentially painful. European politicians were upset when the fledgling euro sank after its launch in 1999, and many of them have been embarrassed by its persistent weakness. National pride in a strong currency is not necessarily rational, however, and the surge in the euro’s value this year has come at a difficult time for economies in the euro area.

Germany, the euro area’s dominant member, is now technically in recession. Official figures published last week show that the German economy contracted in the first three months of the year, the second consecutive quarterly fall...............Perhaps surprisingly, the ECB does not appear to be alarmed by the experience in Japan, where the authorities have failed to make any headway in curbing deflation. Prices in Japan have been falling for more than three years now, and the IMF is worried that the problem could get worse. As its report points out, deflation is hardly ever benign, and the Japanese experience bears this out: the economy is shrinking once again. Tokyo’s failure to grapple with long-term structural problems has led to a succession of crises in the banking sector. While the G7 finance ministers were meeting at the weekend, a giant rescue of Japan’s fifth-largest bank, Resona, was under way. The bank failed to meet new, tougher capital requirements—so it has been saved by an injection of taxpayers’ money, possibly more than $17 billion. It is still unclear whether the rescue signals more of the same old patching up or a new, more radical approach to clearing up the banking sector’s mess. ......The Japanese government is clear that a weaker dollar spells trouble for hopes of an economic revival, and has reportedly been trying to halt the appreciation of the yen. Such efforts, against a background of what used to be called “benign neglect” in Washington, are unlikely to have much impact in the currency markets. If traders think the American government wants to see a cheaper dollar, they are likely to go on selling. For those who hanker after the old days of greater global co-operation, such policy confusion is depressing to watch. What’s happened, they ask, to the idea that countries would agree to monitor currency movements and co-ordinate intervention to prevent misalignments? They forget the world has changed. Greater capital mobility makes it much more difficult—though admittedly not impossible, as recent research has shown—for the authorities to influence currency fluctuations.
Source: The Economist

For those who hanker.......difficult but not impossible. Ay, mi madre, ohalá.

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