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Europe struggles to avoid effects of a U.S. downturn
By Mark Landler
Published: January 11, 2008
FRANKFURT: Can Europe's economy stay on track even if the United States goes off the rails?
This old question is being asked with new urgency across the Continent, after a startling divergence this week in how the European Central Bank and the Federal Reserve are reading the economic tea leaves.
The answer, according to a growing number of economists, is that Europe is not as insulated from America's woes as many Europeans would like to believe. They question why, at such a fragile moment, the European Central Bank is warning that it might raise interest rates.
The Federal Reserve signaled it would cut rates further to try to ward off a recession.
"The ECB sees the glass as half full; the Fed sees it as half empty," said Thomas Mayer, the chief European economist at Deutsche Bank. "It's not a difference in the data; it's a difference in the analysis."
The European Central Bank, Mayer said, still did not believe that the credit crisis originating in the U.S. mortgage market posed a grave risk to Europe's underlying economic prospects. The bank, he said, was threatening a rate increase when it should be preparing for a rate cut.
The simplest explanation for the European Central Bank's hawkish demeanor is its inflation-fighting mandate. The bank's president, Jean-Claude Trichet, has warned labor unions that they should not use Europe's inflation rate of 3.1 percent as a pretext to demand steep wage increases.
But while Trichet has thrust himself into German labor negotiations, several economists argue that the bank is underestimating the effect of a recession in the United States on Europe.
"The ECB is wrong in its assessment that the emerging markets can offset the U.S. downturn," said Jacques Cailloux, the head of euro area economic research for the Royal Bank of Scotland. "The whole idea of globalization is at odds with the thesis of decoupling."
Decoupling refers to the argument that Europe is not as dependent on the United States as it once was. Because Europe's exports to China and other emerging economies have grown so much faster than its exports to the United States, it no longer relies so heavily on the United States and its stalwart consumers.
Read the rest of the article here.
By Mark Landler
Published: January 11, 2008
FRANKFURT: Can Europe's economy stay on track even if the United States goes off the rails?
This old question is being asked with new urgency across the Continent, after a startling divergence this week in how the European Central Bank and the Federal Reserve are reading the economic tea leaves.
The answer, according to a growing number of economists, is that Europe is not as insulated from America's woes as many Europeans would like to believe. They question why, at such a fragile moment, the European Central Bank is warning that it might raise interest rates.
The Federal Reserve signaled it would cut rates further to try to ward off a recession.
"The ECB sees the glass as half full; the Fed sees it as half empty," said Thomas Mayer, the chief European economist at Deutsche Bank. "It's not a difference in the data; it's a difference in the analysis."
The European Central Bank, Mayer said, still did not believe that the credit crisis originating in the U.S. mortgage market posed a grave risk to Europe's underlying economic prospects. The bank, he said, was threatening a rate increase when it should be preparing for a rate cut.
The simplest explanation for the European Central Bank's hawkish demeanor is its inflation-fighting mandate. The bank's president, Jean-Claude Trichet, has warned labor unions that they should not use Europe's inflation rate of 3.1 percent as a pretext to demand steep wage increases.
But while Trichet has thrust himself into German labor negotiations, several economists argue that the bank is underestimating the effect of a recession in the United States on Europe.
"The ECB is wrong in its assessment that the emerging markets can offset the U.S. downturn," said Jacques Cailloux, the head of euro area economic research for the Royal Bank of Scotland. "The whole idea of globalization is at odds with the thesis of decoupling."
Decoupling refers to the argument that Europe is not as dependent on the United States as it once was. Because Europe's exports to China and other emerging economies have grown so much faster than its exports to the United States, it no longer relies so heavily on the United States and its stalwart consumers.
Read the rest of the article here.
