Monday, September 15, 2003
Will the EMU grow to 13?
One of the more eagerly anticipated election outcomes has been Sunday's (September 14) Swedish plebiscite to decide whether the country will join the EMU. Sweden, along with Denmark and Britain, are the three European Union countries that have preferred not to join the common currency. The membership issue has been debated ceaselessly in Sweden as it has in Britain. The campaigning took a lurching turn when a key pro-euro supporter, Foreign Minister Anna Lindh, was murdered while shopping on Thursday. The election was held despite the tragedy, but most are uncertain about the slaying's impact on the result. Polls prior to the slaying favored the anti-euro forces by as much as 9 percentage points. Early exit polls indicate that the no vote has prevailed. It is estimated that some 57 percent opposed joining the currency union.
The impact of France's flagrant violation of the EMU's stability and growth pact is pointed to as a good reason not to join the EMU. The smaller EMU countries that have made the sacrifices necessary to keep their budget deficits under the mandated 3 percent of GDP are furious at the violations by France and Germany. Sweden said that it would follow the rules of the organization and would expect all members to do so!
Sweden has been enjoying lower unemployment and higher growth than the EMU. Its stock market is also one of Europe's best performers. The Swedish economy expanded 0.3 percent in April through June. By contrast, the economies of Germany, France, Italy, and the Netherlands - four of the largest countries to adopt the euro - all shrank in the last quarter. Denmark and Norway (not an EU member), two other Nordic countries that have also stayed out of the euro, have set the pace for this year's rise in European stocks. Their benchmarks have risen 26 percent and 25 percent, respectively. The Swedish benchmark OMX Index has risen 22 percent, led by companies such as Ericsson AB, the world's largest maker of mobile-phone network equipment. The advance is the third largest among Western Europe's 17 benchmarks.
Bank of Japan
As expected, the Bank of Japan kept monetary policy unchanged. The Bank left interest rates close to zero and maintained monthly purchases of government bonds at ¥1.2 trillion ($10.3 billion). Although the economy has been showing signs of life, it isn't likely that this is the end to 12 years of troubles. Deflation remains entrenched and until prices cease falling, it is unlikely that Bank policy will change. The BoJ cut rates to zero in March 2001 and has pumped trillions of yen into the economy, attempting to stop price declines and encourage banks to lend. It has pledged to keep rates near zero until nationwide core consumer prices (excluding fresh food) stay above zero on a year-on-year level. Those prices haven't risen since April of 1998. The central bank has reason to be careful - the Bank raised rates by 25 basis points from zero in August 2000, saying the economy had recovered enough to do so. It was forced to rescind the increase only seven months later.
Prime Minister Junichiro Koizumi, who stands for re-election as head of the ruling Liberal Democratic Party in a September 20th party vote, has pledged to keep curbs on fiscal spending to stop an expansion of public debt and speed up disposal of bad loans at banks. His three opponents say Koizumi's economic policy exacerbates deflation and hurts employment.
The results are in for the second quarter (finally)
At last, all the major countries have posted gross domestic product for the second quarter - and the results are mixed. Of interest is that Japan grew faster than the U.S. and other members of the Group of Seven in the second quarter when compared with last year. Even Canada, which has exhibited strong growth, stumbled - thanks to the SARS epidemic in Toronto and plummeting exports due to one case of mad cow disease. The French, Italian and German economies declined in the second quarter compared with the first quarter. Italy and Germany now are officially in recession. Britain has managed to grow despite an ailing manufacturing sector thanks to their robust housing and consumer sectors.
Equities are "mixed"
Disappointing U.S. data culminated a nervous week for investors and put a damper on market enthusiasm. The anniversary of September 11, 2001 (and a new video of Osama bin Laden) combined with second thoughts about economic growth and profits in the third quarter to push equities down on the week. And the murder of Sweden's Anna Lindh heightened the anxiety factor. Only three indexes followed here managed to end the week on a positive note - Nikkei, Topix and Kospi (but South Korean markets were closed for three days).
Sweden highlights EMU troubles
