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Tuesday, September 05, 2006

Fiscal Tightening On The Horizon

The over-enthusiastic tone of a lot of earlier eurozone and Japan forecasts is now having to come to terms with some evident economic realities, in particular both Germany and Japan are headed for some pretty substantial fiscal tightening in 2007 and this eventuality is not going un-noticed in some quarters:

The taxman is about to pay a visit to consumers and businesses in Europe that will inflict pain around the world.

German Chancellor Angela Merkel and Italian Prime Minister Romano Prodi plan to raise taxes to reduce their budget deficits, increasing pressure on the European economy only months after it recorded its best growth since 2000. Confidence in Europe's expansion is already waning amid rising interest rates, declining foreign demand and record fuel bills.

A slowdown in the dozen euro nations would deal a blow to global growth at a time when the U.S., the world's largest economy, is decelerating with the end of a housing boom.

``It's a delicate time,'' says Harvard University professor Ken Rogoff, a former chief economist at the International Monetary Fund. `It would help a lot if Europe grew more strongly, and raising taxes doesn't make sense.

``If Europe's day in the sun is over and Japan is unable to grow much faster, we could see all of the industrial economies growing more slowly next year,'' says Michael Mussa, senior fellow at the Institute for International Economics in Washington and another former IMF chief economist.

For all the admirable sentiment from Ken Rogoff that strong growth in the eurozone would help power the growth needs of the international economy the tax raising exercise unfortunately makes perfect sense since unsustainable fiscal deficit profiles have been maintained in some key economies (Germany, Italy, Japan) throughout the entire course of the upswing in the latest global cycle, and this of course has to come to an end at some point. Clearly it would have been much more judicious to have economised during the (comparatively) good times in order to have had more leeway during the downturn, but I guess we already knew that.

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