by Violaine Messager

This is a worldwide review of newspapers’ outlook on the evolution of the dollar, interest rates and policies at two points in the time.

End of May
The threat of deflation is overwhelming in Europe and in Asia as announced by the IMF in a recently published report. Germany is very likely to be the first and foremost victim of this phenomenon. In the same time, the US seem to be safe from this threat thanks to the flexibility of their monetary policies in this respect.

The German gloom deserves that questions be asked about the place of this country in Europe. Is the German model going to turn out to be a dead-end after the Japanese one itself failed during the nineties? The first symptom of it consists in Germany’s current recession. France is not yet technically in recession but it should not last. The quarterly estimation for growth of 2003 first three months amounts to 0.3% only and is entirely led by consumption as a residual mechanism for growth support.

Germany and its Central bank used to drive other European countries’ stance in terms of inflation and the ECB keeps being mainly inspired by the same ideas. The ECB is maintaining its stance of zero inflation.

Lower Rates
Meanwhile, the US are ready to lower their interest rates one more time. The American pragmatism is virtuous: the Fed is able to benefit from a low dollar as well as from a strong one. Indeed, the emergency of lowering the current account deficit enables the Fed to enjoy the current exchange rate of the dollar. “At a time of burgeoning domestic demand and productivity gains in the US, a strong dollar made sense. Now, with domestic consumption weak and the risk of inflation minimal, a cheaper currency could fuel growth by making US exports cheaper” as Walter, chief economist of the Deutsche Bank, put it.

Thus, the European Bank sticks to its objective of curbing inflation and refuses to cut interest rates. According to the IMF, Germany is facing the danger of deflation because of its recession combined with maintaining its current policies thus leading to the continuous appreciation of the euro against the dollar.

So far, the Euro’s rise against the dollar has been a recovery from an abnormal situation. At its current level, the euro-dollar exchange rate is close to its average through the 1990s.

Obviously, numerous articles have been lately covering the issue: from the American point of view, the European one, the English one. From the first one, there is talk about benign neglect, and a typically European problem. Americans have even issued a new definition of what is a strong currency (John Snow) in the context of an unprecedented international balance: indeed, “there is no precedent for a country playing the role of global superpower with a large external payments deficit.” But if Europe does not seem to react, Asia will definitely do so. The Financial times foresees a process of competitive monetary reflation. The concern is growing about the new stance.

The media keep brainwashing us with the boycott by Americans of French products, but the lowering of French wine sales finds a simpler explanation: its price is increasing! And the pressure imposed by the US on the UE during the WTO negotiations is bound to increase further and feed trade disputes now that the US have everything to win from a decreasing level of barriers.

The Australian financial review interprets it as disarray in dollar politics since the government did not approve of Mister Snow’s sayings.

The New York Times even features the euro as a shock absorber for the dollar.

In this context, the single currency does not prove to be very attractive. Actually, in Britain, as regards the euro, the stake has evolved: “The new debate about Europe’s future is no longer – as it was in the 1980s – how a single trade block organises its internal markets, independent of the rest of the world, but how all of Europe, thinking globally, can be outward looking.”

A Bit Later
A couple of days after the debate has started to be tackled in the newspapers: Is the dollar weak or the Euro too strong?

Reuters’ quote: “The dollar’s tumble on the currency markets forced its way onto the agenda at a G8 summit in France on Sunday when leaders said that exchange rates would be discussed the following day.”

President Bush said in media interviews ahead of the summit, however, that Washington continued to back a strong dollar even if financial markets seemed to be putting a value on the currency which went against the grain of that policy .

Second Step: One Month Later
The situation has not changed that much as regards the depreciation of the dollar. The last days up until now have witnessed a slight appreciation of the dollar against the euro though. The UN have just released a report that tackles this issue. We used to know about it mainly through the headquarters of the European MNC’s asserting they were not undergoing any problem despite the growing lack of competitiveness.

And the interest rates have just been lowered once more by the Fed. The word deflation has been thoroughly avoided, but the UN do not avoid the term because the hope of the US to stimulate their economy “against” the European economy via a competitiveness effect could prove not to be enough. The American financial markets might be jeopardized …there seems to be a dilemma in the US and in Europe between stimulating activity and limiting deflation. The upturn expected following interest rates cuts keeps delaying. And fighting deflation becomes harder when interest rates are already that low. But Mr Greenspan has mentioned the risk of deflation in public on several recent occasions. He has also used words like “firebreak”, implying that he believes there is a case for strong pre-emptive action. less room for manoeuvre.

The Fed has lowered its rates once more while the ECB keeps hesitating and the first and foremost victim of this situation is Germany, the leading economy of the Union that is in recession. The Economist has introduced a questioning that sounds quite new coinciding with the debate that is set in the UK about choosing the euro: should Germany leave the Union?

Europeans are so overwhelmed by the idea of joining the EU that the very idea of stopping it sounds weird: the common monetary policy is the problem. If the countries are exposed to symmetrical shocks, the ECB responses effectively to this shock by modifying the interest rates. Though, if a shock occurs and affects significantly Germany, the country is left powerless face to this downturn. Indeed, the fiscal policy is constrained through the stability pact: which tools is Germany left with to handle this situation? Nearly none.

This question is consequently interesting and should not be automatically set aside. The EU is not something definite and the efforts to help Germany out should entail this possibility as a last resort.

The initial debate we proposed was a very sectorial one, limited to the monetary aspect. It has been enlarged though to the more encompassing theme of a model choice. The EU proposes a pattern in which to live together and if this pattern is too rigid to learn from its failures, its members should be able to leave despite the strength of their will of participating.

Australians talk more frankly about finance than others: they talk about negative real interest rates (once adjusted for inflation) being the rule in the US for a while: Greenspan is talked about as the terrorist-in-chief of the Fed. All the anticipations of recession and deflation that are a fashionable credo are taken for pure imagination by the same Australian financial reporters. The best formula they found is the following to qualify monetary policy in the US: “it is a way of temporising, keeping consumers treading water in an ocean of liquidity until they feel the solid ground of corporate investment under foot” America waiting for Godot…