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Saturday, September 28, 2002


The decision to allow France, Germany and Italy until 2006 to comply with their balanced budget commitments has not please some of the EU smaller partners who have already made great efforts to comply. Of course each case is different, Italy, for example, appears to be making a standing joke of the whole process, while both France and Germany can muster case specific arguments in their favour. Additionally the condition of the world economy is arguably significantly different - much worse - from when the pact was originally agreed, and thus flexible, rather than 'letter of the law' interpretations are probably the order of the day. The bottom line, however, is that it is precisely this need for flexibility, and country specific measures according to contingency, that places the question mark over the Euro process itself. The stubborness of the ECB on the interest rates question places another. And in the end the good-order countries have a right to feel cheated, not to mention the consequences of all this where a Euro membership vote is looming.

Anger erupted across Europe yesterday over plans to allow France, Germany and Italy an extra two years to balance their budgets, in one of the most serious rows since the launch of the euro. Some smaller EU countries, which have already taken painful measures to eliminate their deficits, are upset over proposals to give the euro's three biggest economies until 2006 to do the same. They claimed the European Commission plan showed there was one rule for the big countries and another for the rest, and that it damaged the budgetary discipline underpinning the euro. Although markets have so far reacted calmly, many think the euro could be damaged if respect for the budgetary rules in the EU's stability and growth pact breaks down.

Yesterday France published its budget for 2003, with tax-cutting plans that clearly break its commitment to achieve a balanced budget in 2004. Italy's budget next Monday is also expected to signal a postponement in the target date for scrapping its deficit. Although both countries are suffering from sluggish growth, many EU members think Paris and Rome are flouting the stability pact by pushing through election pledges to cut taxes.
Source: Financial Times


An FT editorial muses over whether the combination of an over-reliance in the rest of the globe on US economic leadership, the unsustainability of current account deficits, the oil price consequences of conflict in the Middle East and the increasing fragility of emerging markets (particularly in Latin America) might all prove a bit too much to swallow, and hence speculates as to the likelihood or otherwise for an extension of Japan-style problems:

While the present uncertainty persists, finance ministers must tackle a much more immediate question. Avoiding Japan's fate is the objective but is it better to do everything possible now to keep economic expansion going and risk a bigger bust later, or to allow the imbalances that built up in the upswing to unwind more quickly and accept the consequences?

The problem is: the question cannot easily be answered because current economic conditions are unclear, let alone those in the future. The orthodox, and probably correct, view is: do everything possible to avoid a recession. Given the risks, interest rates should probably fall further. And in Europe, where imbalances are much less worrying, policy should certainly be relaxed. Is the European Central Bank listening? Or is it inclined, like the Bank of Japan, to blame others for Europe's woes?
Source: Financial Times


Japans core consumer price index fell for the 35th consecutive month in August, down 0.9 per cent year-on-year. Unemployment in August was just below post-war highs at 5.4 per cent. The number of jobless increased by 250,000 year-on-year to 3.6m. To cap this extremely depressing batch of economic data household spending fell 2 per cent in August month-on-month. This seems to indicate that Japan is as much in the grip of deflation as ever and should give the G7 leaders assembled for the Washington summit plenty to muse over. Meanwhile, in an attempt to deflect criticism, Japan's leaders are suggesting that they may be prepared to act more agressively on the bad loans problem that plagues the banking system:

Japan will tell fellow members of the Group of Seven industrialised nations in Washington this weekend that it is prepared to use public money to bail out its debt laden banks, Masajuro Shiokawa, finance minister, said yesterday.

But the veteran politician offered no details of how the potential injections would take place and insisted the bailout would only proceed "if necessary", offering policymakers a range of options to avoid having to abide by this strategically timed pledge. Members of the G7 have been calling for a meaningful resolution of Japan's bad debt problem for many years and Mr Shiokawa's statement is likely to mollify them. But it could backfire if not backed by action. "At the meeting I will stress the importance of banks' liquidation of corporate borrowers in serious trouble. As a result we may inject public funds into banks, if necessary," Mr Shiokawa said yesterday.

Despite the rumours of his demise, Mr Yanagisawa - Japan's Financial Services Minister -was in unrepentant form yesterday, insisting an injection of funds is not needed but making his first public commitment to a scheme that would help the banks by expanding the role of the Resolution and Collection Corporation (RCC).Mr Yanagisawa said yesterday he would accept the use of public funds only if they were used to cover losses incurred by the RCC when it offloaded the loans it had purchased from the banks.The minister's comments neatly capture the core of the debate over how to deal with the bad loan problem. One view - the true bailout scenario - involves public funds being injected directly into the banks, wholesale management changes, a short-term rise in bankruptcies, rising unemployment and potential political and social unrest.The other view - the quasi bailout scenario - involves the bad loans being transferred to the RCC, which will offer a better price for them than previously. This will restore the banks to health but leaves borrowers just as bankrupt as before, but able to struggle on.
Source: Financial Times