US growing deficits are putting eurozone’s recovery at risk; Greece faces payments crisis

The joy the extremely quick US victory in Iraq brought to international investors should not mislead us to false conclusions about the state of the global economy. The need for deep structural changes remains real and is very important. Until recently, we have exempted the United States from those countries that will have to make changes. Just before the war started, it became evident that the US economy is also in need of intervention, just as the European economies are, although in different sectors. During the same period, the need for radical reform in Latin American countries became starkly evident. But even in Asia, excluding Japan, which continues to be in a strange state of economic hibernation, the situation has too become more vulnerable. Analyst are now concerned about the effects of severe acute respiratory syndrome (SARS) on the region’s economies. In other words, the global economy is on the edge, balancing delicately between growth and recession. In any case, we will not see a return to dynamic growth in the next few months. Even in 2004, a year in which the rise in most countries’ gross domestic product (GDP) is expected to accelerate, risks will be present and it is doubtful that the problems will be tackled in a convincing way. A lot will depend on the Bush administration’s ability to boost the rise of the United States’ GDP. For this year, the rise will be 2.2 percent, according to recent forecasts by the International Monetary Fund (IMF), or 2 percent, according to a more pessimistic forecast by Morgan Stanley economists. Resorting to a further tax cut, besides creating further problems for economy’s fiscal position, remains politically uncertain, despite the Bush administration’s control of both houses of Congress since the beginning of the year. The USA’s two deficits – in the budget and in its external account – remain a threat to other economies, especially those of the eurozone. Even here, in Greece, we are much more dependent on these developments than we would like to think. There is no doubt that, with the US external deficit exceeding 5 percent of its GDP, as is forecast for this year, the European economy can still support its anemic growth, despite the sudden decline in domestic demand. However, the persistence of the US deficit will inevitably lead to a strengthening of the euro against the dollar, further reducing the competitiveness of European products. The US external deficit perfectly illustrates the lack of symmetry in today’s globalized economy. Near-zero savings make the US economy dependent on capital inflows. If this continues, hopes for a recovery in internal demand in the countries where these capital inflows come from are very few. In this sense, it is wrong to pin hopes for a European economic recovery on a robust US economy. In this situation, the widening of the US fiscal deficit makes things even worse. It will lead to an even deeper decline in savings and the country will face a dearth of capital. The eurozone, which apparently will not achieve growth greater than 1 percent this year (0.5-0.7 percent growth is more likely) will need to make disbursements from available resources should there be increased migration of capital to the US. Should eurozone countries’ deficits increase further, the Europeans will confront even higher costs of financing the welfare state. Should this happen, any plans to lessen the burden on taxpayers will be postponed and the cost of financing social security will increase. The above conditions, if confirmed, will force the European Central Bank (ECB) to reduce its rates, even below 2 percent. The use of the countercyclical intervention facilities that the ECB maintains, in contrast with the Fed and, obviously, the Bank of Japan, may lead to a defensive policy of conservation and stagnation. This may lead to Germany, which accounts for 28 percent of the eurozone GDP, becoming the second victim of deflation, after Japan. This is graver than we think. Those who say that Greece can plow ahead, immune to such turbulence, are not very convincing. If the calculations that put the effect of EU inflows to Greek growth at no more than 1 percent of GDP are correct, then the endogenous growth factors and, especially consumer demand, will be exhausted in the next 12-18 months. Greek enterprises’ accounting departments already know we are much closer to a payments crisis, which may become systemic.