Federal Reserve:
Through the haze of Chairman Alan Greenspan??¢â???¬â???¢s testimony last week can be seen the central bank??¢â???¬â???¢s position.
1) The Fed is ready to begin a very modest, very cautious series of interest rate hikes, in recognition of the reality that neither inflation nor deflation threatens the economy today.
2) The tentative plan: an increase of 25 basis points this year before the election; an increase of another 25 basis points this year after the election; early next year, an increase of another 50 basis points. All that adds up to only 100 basis points, bringing the current 1% federal funds rate up to only 2%.
3) Greenspan is expected to be quite cautious to avoid the excessive tightening that has occasionally backfired during his long tenure at the Fed. He is known to be particularly sensitive to what his moves at the Fed can do to dangerous economic climates in Japan, Europe and especially Latin America.
Germany:
Further cracks are appearing in the European Union??¢â???¬â???¢s strength, as France and Germany take swipes at new member states.
1) German Chancellor Gerhard Schroeder has publicly called on the new EU members, from Eastern Europe, to raise their corporate tax rates. Germany??¢â???¬â???¢s corporate rates are currently 38%, the highest on the continent, and Schroeder is scrambling to find a way to stop the bleeding of jobs.
2) This call by Schroeder is probably, in the end, no more than some political posturing in an effort to save himself domestically. Job loss in Germany is politically costly to Schroeder, and he is desperate to find a way to save himself from voter wrath on the topic.
3) In the last few years, Schroeder has made an effort to fix the economy and the employment picture through reforms. The efforts were unpopular, but Schroeder hoped they would turn around the job picture. However, unemployment has hovered around 9.3%, higher than the EU average.
4) Schroeder also moved to liberalize some of Europe??¢â???¬â???¢s worker-protection laws, a push that cost him some labor union support. Still, Germany??¢â???¬â???¢s economy is far too regulated and its businesses are far too highly taxed. The political toll of these reforms could seriously cost his party in this year??¢â???¬â???¢s elections.
5) Because Schroeder feels helpless to solve the problems, he is blaming job loss on other nations. This peculiarly European form of protectionism blames other nations for having too low tax rates, and thus stealing jobs that way. The accession of the Eastern European nations to the EU creates new fears that they, who have all lowered their rates recently, will become new targets for German businesses to move jobs.
6) The job loss to other European nations is creating an anti-EU backlash in Germany. Exacerbating that sentiment is the fact that Germany pays the most amount into EU coffers, and gets far less in return per capita because EU money mostly goes to farmers and depressed regions, of which Germany has few.
7) Schroeder??¢â???¬â???¢s troubles continue a trend that began with the defeat of Spanish Prime Minister Jose Maria Aznar. In Europe, broad discontent over employment and other issues may drive voters in the coming year to oust the current ruling party. In the 2002 elections here, most states threw out the governing party in reaction to the relatively poor economy.
Britain:
Similarly, domestic political pressure has trumped European diplomacy in driving British Prime Minister Tony Blair to turn UK ratification of the European constitution over to a referendum.
1) Opposition leader Michael Howard had criticized Blair for trying to rush British approval of the EU??¢â???¬â???¢s constitution. Blair said no popular referendum of the constitution was needed because it was merely codifying and simplifying EU laws and regulations that were already in place.
2) Blair realizes that he will need some Conservative support to survive, considering the liberal displeasure over his support of the Iraq war and President Bush. To maintain his conservative support, Blair has needed to defuse the EU constitution as an issue.
3) The European constitution is nothing like the American constitution, which fits on a few pages. The EU version is 266-pages long, and, unlike the U.S. constitution, does not confine itself to to limiting the powers of government.
4) Britain remains Europe??¢â???¬â???¢s most steadfast holdout from EU ascendancy over the member-states. Some of this British Euro-skepticism is due to Bush??¢â???¬â???¢s success at fostering a relationship with Blair. Now, Blair??¢â???¬â???¢s left-leaning Labor Party has a personal tie to the U.S. administration while the right-leaning Tories have an ideological tie to the Bush White House.
5) The British public will likely reject the constitution, much as they rejected adoption of the Euro.
