Evian Meet Fails To Lessen Eurozones Economic Woes

Written by Malcolm Subhan | Brussels, June 7: | Updated: Jun 8 2003, 05:30am hrs
Its the economy, stupid! Of course you cannot call such world leaders as George Bush, Tony Blair and Gerhard Schroeder stupid. And yet the fact remains that when the leaders of eight of the worlds richest economies, except Russia, met in the French resort town of Evian, the unhealthy state of the American and European economies hardly registered with them.

It was politics, politics, politics! Of course there is nothing like politics to inflate your ego, especially if youre a world leader. After all, who remembers politicians who lead their countrys economies from strength to strength There was Ludwig Erhard, who brought about the German economic miracle after the World War II. And FDR, credited with pulling the US out of recession, but better remembered as a wartime leader. And Ironically, when Valery Giscard dEstaing, the then French president, called the leaders of the US, Britain, Germany and Japan to a closed-door meeting in 1975, it was precisely in order to see how to relaunch the world economy, then in the grip of stagflation and struggling with the four-fold rise in the price of oil, no thanks to OPEC. High on the agenda of the five world leaders was how to get the locomotive economies of Germany and Japan pulling the world economy forward once again.

The Evian summit declaration conceded that our economies face many challenges. But it noted that major downside risks have receded and conditions (for an economic) recovery are now in place. The latest economic forecast, issued by the European Commission, the executive arm of the 15-nation European Union, was less optimistic. It concluded that things will get worse before they get better, although the ECs economists thought that a recession was unlikely in the Union in the first half of this year.

Their report on recent developments in the EU economy could be seen as strengthening the hands of Gordon Brown, British chancellor of the exchequer. The 12-nation Eurozone is performing less well than the EU as a whole. Given that Britain is not a member of the Eurozone, along with Denmark and Sweden, this means that the British economy is doing better on the whole than its 12 EU partners who have adopted euro, the Unions single currency.

The Eurozone escaped recession during 2001 by the skin of its teeth, so to speak: GDP fell in only one quarter. Recovery last year failed to gain momentum, so that growth during the last quarter of 2002 decelerated to 0.2 per cent. The Eurozone forecast for this year is a poor 1 per cent GDP growth as compared to 1.3 per cent in the EU as a whole.

Britain has done considerably better. Its economy grew by 1.8 per cent last year, and is forecast to grow by 2.2 per cent this year, and by 2.6 per cent during 2004. Domestic demand is expected to remain strong, with imports of goods and services rising by an estimated 3.6 per cent this year and 4.9 per cent during 2004.

Now compare this with the situation in Germany, for long economic powerhouse of the Union. The German economy is expected to grow by just 0.4 per cent this year, because of faltering domestic demand. Business confidence indicators are low, and GDP growth next year is forecast at just 2 per cent. On the other hand, the strong decline in imports during 2002 is expected to be reversed this year.

Indian exporters cannot ignore the EU market, of course. But the fact remains that imports are more buoyant in the US than in the EU. Merchandise imports into the Union are expected to rise by 3.6 per cent this year, and by 5.8 per cent next year. The corresponding figures for the US are 6.1 and 7 per cent.

Exporters to the EU can expect increased competition from the 10 Central European and Mediterranean countries that are joining the Union next May. Full membership will probably increase their dependence on the EU market for their exports. Even now, two-thirds of the exports of these 10 countries are to the EU. Over the 1997-2002 period, their merchandise trade with the EU increased faster than that of other non-EU countries.

The strong euro is bad news for EU exporters, but good news for Indian exporters. How long the present situation will last is another matter. The Evian summit seems to have paid little attention to the plunging dollar, perhaps because a weak dollar, together with higher productivity gains in the US as compared to the EU, will help American exporters.

EU exporters may complain about the strong euro; but then its sharp rise in relation to the dollar is welcome news to the advocates of the single currency. The fact is that a weak euro was seen by them as evidence of a lack of confidence in the currency and in the Eurozone itself. The ECs economists were hopeful that the geo-political tension generated by the war in Iraq will have ended by midyear, leading to increased business confidence and the normalisation of international relations. But, prudent as ever, they concluded that given the high level of uncertainty, the EU growth rates may continue to stagnate.

The bright spot in the global economy Asia, where growth continues to be buoyant, outside Japan, that is.