Economic and monetary conditions in the Euro area : the ECB, the FED and the euro

Will Europe be immune to the slowdown of growth in the US? According to the US treasury secretary Paul O’Neill it will be illusory to believe that Europe will avoid to be hit by business conditions in the other side of the Atlantic. In my last briefing paper I tried to sketch the broad reasons explaining why the transmission of the US slowdown to Europe will not be as mechanical as some would like us to believe, provided that monetary conditions in Europe do not become more restrictive. True growth forecast for Europe have been generally revised downward – the IMF revision being the more severe (from 3.4 to 2.4) – but most institutes are agreeing on a figure slightly under 3%, the consensus forecast being 2.7%. At least for the moment a strong impact is not in sight. But there is also the question of Europe’s responsibility towards the global economy. World growth which has been buoyant in 2000, at a rate around 5% is expected to be a little above 3% in 2001. It is thus no wonder that bitter comments are coming from IMF officials about the excess of prudence of the ECB: according to Michael Mussa the IMF’s chief economist “It is time for the ECB to become part of the solution, not part of the problem of slowing growth…on purely domestic ground the balance was at least neutral, and from a global perspective the case for easing was unambiguous”. These are strong words especially if one considers what would be appreciated as a good move by the ECB, a moderate cut of, say a quarter of a point. To say the least, the absence of such a move by the ECB – an actual interest rate of 4.75% instead of 4.5% -- would be, in the worst case, considered as a very small mistake. (And, incidentally was the FED right in not having cut its rate between may 2000 and january 2001?)