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Could European Economies Withstand a US Downturn?

The Financial Times (via EU Digest) begins its analysis with:
Currency traders have become convinced over the past two weeks that something big is afoot in the global economy. They are not convinced by the sanguine noises coming from the Federal Reserve and think the risks of a "hard landing" in the US economy have risen. But, in a departure from the old wisdom, they do not seem worried about the effects of a US downturn on European economies – rejecting the old adage that "when the US sneezes the rest of the world catches a cold". They appear to be trading on the belief that, while US interest rates will fall in an effort to counter a slowdown, European rates will continue to rise – and, by implication, that Europe's economic upswing has some way to go. This has led to steep declines in the dollar, which tumbled to a 20-month low against the euro and to a 14-year trough against sterling.
According to DW World, Germany is in "Sustainable Recovery":
Germans will need a bigger cart to satisfy their current shopping urges.  Consumer polls and expert forecasts paint a rosy picture for the German economy. But will unemployment decline quickly enough to offset the negative effects that next year's VAT hike will have on consumer spending? The Organization for Economic Cooperation and Development (OECD) said on Tuesday that it expects the German economy will continue to expand in the coming two years. In its latest World Economic Outlook, the OECD predicted that growth in gross domestic product would reach 2.6 percent in 2006, 1.8 percent in 2007 and 2.1 percent in 2008.
Those are rather modest numbers compared to US growth in recent years. Still, the ILO-labour market statistics are welcome news: "The number of unemployed was down by 450,000 (–12.7%) on a year earlier. This means that employment showed the highest, and unemployment the lowest October level since 2001."

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Nanne on :

Actually, these levels of growth are quite good when compared to the USA, if you take into account that Germany has a stagnant population whereas the US population grows by about 0.9%.

David on :

The US Dollar's decline over the past couple of months is an indication of structural weakness. The [url=http://economist.com/opinion/displaystory.cfm?story_id=E1_RPVPTSJ]Economist[/url] has more: "So, contrary to popular perceptions, America's economy has not significantly outperformed Europe's in recent years. And to achieve this not-much-better-than parity, America has had to pump itself full of steroids. Since 2000 its structural budget deficit (after adjusting for the impact of the economic cycle) has widened sharply, while American households' saving rate has plunged, causing the current-account deficit to swell. Over the same period, the euro-area economies saw no fiscal stimulus and household saving barely budged." So Europe has done just as well as the US without: 1) going deep into debt; and 2) increasing economic inequality - i.e. the middle and lower classes have fared much better than their American counterparts.

Zyme on :

David In a fair comparison, you have to acknowledge that economic inequality has risen considerably in Europe, too. In fact it is a waste of energy to discuss this development, as there is little we can do about it. It is simply the consequence of what we call "the society of knowledge" in Germany. In such a society it becomes harder and harder for those who lack the mental ressources to take part. Jobs for the lowly-qualified are the primary ones that are outsourced into the third world. So we cannot expect this develpment to come to a halt in the foreseeable future. Additionally, western Europe has a simple advantage regarding the growing economies: Our geographical neighbourship with the eastern european markets makes it a lot easier for our companies to profit from their development. Furthermore I believe that american companies are at a disadvantage in Russia and China, because of the political rivalry between the respective governments. So is not too surprising that Europe is less connected to America´s economical situation than it was a decade ago. And since we obviously can no longer rely on the stability of the economical growth in America, Europe has to advance the creation of additional pillars for our Economy.

Don S on :

I don't know. How do you account for the fact that US per-capita income is some 40% higher than levels in Germany today after Germany almost reached parity with the US a generation ago?

roman on :

I agree with Roubini, that US has not seen the bottom of the real estate yet & therefore hard landing is still possible.

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