By Anne D. Picker, International Economist,Econoday
Monday, October 21, 2002

One-size-fits-all monetary policy is stressing politicians in Germany, France and Italy. The nations are struggling to keep fiscal deficits under 3 percent of gross domestic product as mandated by the EU Growth and Stability Pact. (The Pact was conceived as a policy framework to support the euro.) With deficits pushing the ceiling, some political leaders are looking to the European Central Bank for interest-rate relief. But applying pressure on the ECB probably won't help, as the bank is fiercely sensitive to political arm-twisting. Portugal is already in trouble and about to be punished for breaching the 3 percent ceiling. Germany, France, and Italy are not far behind. A change in the balanced budget deadline has some participants (mainly smaller countries) upset as they already have met the stringent requirements. Exacerbating the situation is ECB intransigence on interest rates, as they myopically follow their inflation ceiling mantra, in part to keep fiscal policy in line.

The capacity of investors to absorb news varies from day to day. This is especially true as it applies to earnings. Reactions depend upon who the company is, what the market is already doing, and of course, exogenous news of looming geo-political actions. Last week, the indexes in Europe and Britain alternated between exuberance and pessimism on a daily basis. However, Asian indexes followed here managed a totally positive week (the exception was the Singapore Straits, which slipped on Friday). On the week all indexes followed here rose, anywhere from 2.2 percent (Mexican Bolsa) to 14.2 percent (South Korean Kospi). This is the first time since the week of March 8th that all indexes posted a weekly gain.

The Bank of Canada left its key lending rate unchanged at 2.75 percent (a percentage point above the comparable U.S. Fed funds target). The Bank has raised rates three times already this year because of strong Canadian growth, but has paused on concern that exports might fall with global demand. But the Bank has made it clear that rates will probably need to rise further in order to control inflation as the economy expands. The central bank, which has an inflation target range of 2 percent to 3 percent, aims for the mid-point of 2 percent.

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