Monday, May 19, 2003
Beleaguered European economies are struggling to keep their heads above water, or rather - growth over zero. First quarter GDP was negative in both Italy and Germany, and the flash EMU GDP indicated that growth was flat for the entire region. The French and German governments have violated the Growth and Stability pact, which specifies that all EMU members have fiscal deficits below 3 percent of GDP. It has been often stated that the problems with Europe could be fixed if structural rigidities were ironed out. France's efforts along these lines met with a nationwide strike last week. Although France vows to push reforms forward, politicians are notoriously loath to put their careers on the line when voters object. The German government, battling to cut spending and avoid recession, dropped its pledge to balance its budget by 2006, adding to the strain on the stability pact. And France admitted it would rack up two consecutive deficits in excess of 3 percent of GDP as well. Governments are left with few options to stimulate growth. Fiscal spending is limited by the stability pact and monetary policy is set elsewhere.
The group of seven finance ministers met this weekend as they traditionally do immediately prior the annual summit. (The summit will be held this year on June 1st and 2nd in France.) Russia joins in for some discussions to make it the group of eight. With the U.S. dollar crumbling and the yen soaring out of intervention control, speculation whether foreign exchange would be addressed at the meeting swirled in the markets. U.S. Treasury Secretary Snow sent the dollar nose-diving against the yen and other major currencies last week with remarks that made traders suspect Washington is wavering on its strong-dollar doctrine. Nothing could be worse for Japan, which has been dumping yen on the foreign exchange market to keep a strong yen from squelching its export-reliant economy. The statement released at the end of the meeting said nothing about foreign exchange, an omission that might be interpreted by the markets as endorsing the dollar's slide.
But some of the finance ministers addressed the issue in their press conferences. They told reporters after the meeting they agreed to avoid explicit reference to foreign exchange markets due to the absence of their central bankers. Meetings without the bankers avoid written references to currencies, they said. The finance ministers also said currencies were discussed as part of a general economic assessment and there was agreement to continue to monitor markets and cooperate if action was necessary - an oft-repeated line that is included in their communiqués.
With the exception of Asia, it was a pretty good week for equity markets. Volatility diminished for equities but not for currencies. The unending stream of disappointing economic indicators did not particularly turn off investors in Europe, Britain and the Americas. On the week, five of the six Asian equity indexes declined anywhere from
0.1 percent (Australian All Ordinaries) to 1.3 percent (S. Korean Kospi). Increases in the remaining indexes ranged from 0.1 percent (Hong Kong Hang Seng) to 2.0 percent (British FTSE 100). All Asian indexes plus the French CAC remain under year-end levels.
GDP provides no relief
