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World: IMF Economist Sees Need To Cut Interest Rates In Europe

  • Andrew Tully

A senior official of the International Monetary Fund (IMF) is using Eastern Europe as an example of the interdependence of regional economies -- and a reason for the European Central Bank (ECB) to cut interest rates. If the ECB does not act, he says, Western Europe's economy may slow more than anticipated -- to the detriment of Eastern Europe's economy. Our correspondent Andrew F. Tully reports.

Washington, 27 April 2001 (RFE/RL) -- The chief economist of the International Monetary Fund (IMF) is adding to the growing pressure on the European Central Bank to lower interest rates.

Michael Mussa said the world economy in general -- and particularly the economies of the transitional economies of Eastern Europe -- rely heavily on the economy of Western Europe.

Mussa acknowledged that both regions can expect economic growth rates better than that of the U.S. this year, but he said the Europe must not delude itself into thinking that its economy is immune from the downturn in the U.S., which is leading to economic sluggishness elsewhere in the world.

He made his comments Thursday (26 April) during a news conference at IMF headquarters in Washington, where the Fund and its sister financial institution, the World Bank, are preparing for their spring meetings. The conference was held to formally release the Fund's semiannual World Economic Outlook.

The study says economic growth in Eastern Europe and Central Asia will continue to be robust this year and next, but not as great as it was in 2000. Overall, it says, growth in these transitional economies is expected to be 4 percent this year and 4.2 percent in 2002. They grew by 5.8 percent in 2000, the report says.

This anticipated rate of growth compares favorably with the global rate, which is forecast to be 3.2 percent this year and 3.9 percent next year, after 4.8 percent in 2000. Similarly, the rate of economic growth in the U.S. is expected to be 1.5 percent this year and 2.5 percent next year. America's growth rate last year was 5 percent.

Mussa said that last September, the outlook for the world economy as a whole was expected to grow by 4.2 percent this year. But he said the abrupt slowdown in the U.S. economy changed that forecast.

"Now it is clear that global growth is slowing more than was anticipated, or is desirable. The IMF staff forecast for world economic growth this year has been cut a full percentage point to 3.2 percent. For the United States, which has been the mainstay of the global expansion in the past decade, growth this year is forecast to be only one-and-a-half percent, down from almost 5 percent last year, and from an earlier forecast of over 3 percent for this year."

Mussa said an important reason for the current worldwide economic downturn is the slowing of economic growth in the U.S. He says he believes the economic slowdown will be brief, but stresses that there is no guarantee that it will not become a more protracted recession.

The IMF's analysis says the European Union's economy is expected to grow by 2.4 percent this year -- nearly a full percentage point more than the U.S. economy. But Mussa said Europe should intervene, as the American government has, to stimulate its economy.

He noted that the Federal Reserve Board, the U.S. central bank, has acted four times this year to lower interest rates. And he cited U.S. President George W. Bush's proposal for a reduction in federal income taxes, which is likely to pass Congress in some form. Both, he said, are positive moves to help restore health to both the American and the global economies.

Mussa said the European Central Bank (ECB) also must cut interest rates, and he argued that the economies of Eastern European nations -- which rely on the Western European economy -- will need such action for their own economic well-being.

"For the transition countries, relative optimism still seems warranted, provided that growth prospects for Western Europe do not deteriorate significantly further."

But since last autumn, the ECB has adhered to a policy of non-intervention in interest rates. The bank recently has been considering a shift in policy, but on 26 April -- just hours before Mussa spoke -- the bank issued a statement in Frankfurt saying it is keeping its key interest rate at 4.75 percent.

Mussa said such inaction is indefensible, especially because Europe faces no real threat of inflation, especially in the 12 countries that have adopted the euro currency.

"In a period when [a] general economic slowdown is the main problem, and when inflation is not likely to be a continuing threat, the euro area -- the second-largest economic area in the world -- needs to become part of the solution rather than part of the problem of slowing global growth."

This statement was a direct contradiction of Wim Duisenberg, the ECB's president, who has consistently maintained that inflation is Europe's chief worry.

Mussa is not alone in calling for action. His speech today reinforced similar calls by the IMF's managing director, Horst Koehler. The United Nations also has called for a European interest-rate cut. And so has Paul O'Neill, the U.S. treasury secretary.

In fact, O'Neill's urgings have created something of a trans-Atlantic argument between American and European economic officials. Last week, O'Neill said in Washington he was baffled that Europe believed it was immune to the global economic downturn. There was a quick response from Pedro Solbes, the European commissioner for monetary affairs. Solbes said Europeans were in a better position than O'Neill to assess their own economy.

Michael Calingaert is an economist at the Brookings Institution, an independent policy institution in Washington. He says Duisenberg is on "fairly safe ground," as he put it, to resist any inflationary action. Calingaert explains that the ECB's charter puts inflation control ahead of economic growth.

But Calingaert also says Europeans tend to minimize the interdependence of the U.S. and European economies by noting that other regions are far more reliant on trade with Americans. But he says this is deceptive.

"The effect of a downturn in the U.S. economy is felt in more than just trade."

Calingaert says Europeans too often do not calculate the importance of investment by American business in Europe and vice versa, which links the two economies. Finally, he says, it is important not to underestimate the psychological effect of a U.S. economic slump on the buying and investing habits of Europeans. If they do not feel optimistic about spending, they will not spend, according to Calingaert.

Meanwhile, the difference of opinion between EU and American economic officials is expected to be taken up on Saturday (28 April) during an informal meeting of the Group of Seven (G-7) leading industrial nations in Washington. Most delegations to the annual IMF/World Bank spring meetings in Washington send their finance ministers and the chairmen of their central banks. The ministers from the G-7 -- Britain, Canada, France, Germany, Italy, Japan, and the U.S. -- take this opportunity to hold informal meetings at the U.S. Treasury.

Discussions at recent G-7 meetings have involved Japan's struggling economy. But the focus at Saturday's meeting is expected to shift to the ECB and its reluctance to join the U.S. in economic intervention.