COSTLY ILLUSIONS:

Surging US economy leads global recovery (Mark Tran, February 6, 2004, The Guardian)

The US economy strengthened considerably in December, leading the global economic recovery and leaving Europe and Japan behind, the Organisation of Economic Cooperation and Development (OECD) said today.

The upbeat assessment of the US economy from the OECD came just hours ahead of a meeting of finance ministers from the G7 group of leading industrialised countries, with the weakness of the dollar the prime subject of concern. [...]

The OECD's data will give John Snow, the US treasury secretary, something to crow about amid unease - especially in the eurozone - at the fall of the dollar, which threatens to hurt European exports and, by extension, the fledgling recovery in continental Europe.

Joseph Stiglitz, the Nobel-prize-winning economist - and a critic of US economic policy - predicted that Mr Snow would oppose any efforts by the G7 to counter the fall in the dollar. In interviews with the French media, Mr Stiglitz, a former chief economist at the World Bank, also called on the European Central Bank (ECB) to act to bring down the euro's strong exchange rate against the dollar.

"The Bush administration will make no concession," Mr Stiglitz told the French business daily La Tribune, ahead of the meeting of G7 finance ministers and central bankers in Boca Raton, Florida. "George Bush needs the fall in the dollar to support American growth and to be re-elected, even if that is to the detriment of Europe." [...]

"The European Central Bank should intervene to bring down the exchange rate of the euro and it should also lower interest rates," he told France Inter radio. "If it did this, and it could do this if it wanted to, almost surely the euro would decrease in value relative to the dollar."

The ECB left interest rates unchanged at 2% yesterday - twice the 1% level in the US. Jean-Claude Trichet, ECB president, warned of the risk of excessive exchange rate movements but declined to comment on what action the G7 finance ministers might take on currencies.

Mr. Stigltitz is not wrong that exchange rates are primarily political, but he ignores the fact that current imbalance is a result of Europe keeping its interest rate artificially
high in order to make the euro seem a plausible currency and Europe still a significant power while it sat out the war in Iraq. France and Germany chose to retard their own economies rather than fight terror and now they're paying the price.

Posted by Orrin Judd at February 7, 2004 11:36 AM