[PEN-L:28105] Guardian on Greenspan and European expansion

[Chris Burford <cburford@xxxxxxxxxx>]

Today's editorial in the Guardian comments guardedly on Greenspan, and
gives an archly revolutionary call for Europe to assert its economic
strength. Despite the last line, this is not however a marxist analysis.

Chris Burford




Market maestro but US downturn could help Europe

                                    Leader
                                    Wednesday July 17, 2002
                                    The Guardian

Alan Greenspan, chairman of the US Federal Reserve, worked his fabled magic
on the markets yesterday. His carefully chosen words triggered an
immediate, if partial, recovery in share prices that eluded George Bush on
two separate occasions in the past week. It must be the way he tells 'em.
Things may look different later in the week when market analysts have gone
into overdrive reinterpreting Mr Greenspan's every word. Too many investors
believe, like Canute's courtiers, that the man they call the Maestro can
turn back the waves. Mr Greenspan cannot - and he knows it. If he has
doubts, he only has to remind himself that the Dow Jones index, even after
recent falls, is still 40% above where it was in December 1996. If it falls
back to that level or below, it will not be difficult to find reasons why.

Mr Greenspan was right to be upbeat about the strength of the real US
economy. Consumer spending is holding up quite well, industrial output rose
by 0.8% in June and he expects the economy overall to expand by 3.5% this
year. It is the strength of the financial economy that is the problem. The
key question is whether the gloom it currently generates, especially from
accounting scams, will eventually infect the real economy. This could
easily happen. If the wealth that US consumers have built up in stocks
crashes, Americans may decide to rein in their spending sharply. As Mr
Greenspan observed, "spending will continue to adjust for some time to the
declines that have occurred in equity prices". Meanwhile, the dollar has
started its long expected decline and, if it accelerates too fast, will
further destabilise the financial economy, leading to an exodus of the
capital funds that have poured into the US in recent years and which have
been supporting the dollar.

The Fed chairman told Congress yesterday that "infectious greed" has taken
hold of US boardrooms. He identified the leadership of chief executives as
the source and solution to the problem. He clearly favours voluntary
answers (along the lines of Coca-Cola's treatment of stock options) rather
than intervention. Either way, it could be some time before confidence
returns to the markets, if only because investors have lost faith in the
figures on which investments are based.

It is no use Europeans gloating over US problems. No matter how you look at
events in America, the underlying health of its economy is much more
resilient than Europe. The US has just emerged from one of the mildest
downturns it has ever experienced, in spite of September 11. Mr Greenspan
calculates it will grow at three times the rate of the eurozone (as long as
financial meltdown does not happen). It is time Europe woke up to this
disparity. For too long Europe has been relying on the US economy to be the
locomotive of global recovery. It is as though Europe still cannot believe
the economic strength it has accumulated within its trading area. The
eurozone alone has a trade balance of $65.5bn while the US sports a deficit
of $423.2bn. Well over 90% of Europe's trade is between member countries,
so the benefits of expansionary policies would largely benefit Europe
itself. The recovery of the euro against the dollar may worsen
competitiveness with countries outside the eurozone but that is not a major
worry, given the strength of internal trade. A strong euro will reduce
import prices, and thus put more money in consumers' pockets. It ought to
be a signal for the European Central Bank and its member governments to
adopt more expansionary policies. Europe has nothing to lose except its
economic chains.