Euroland : recovery is under way

The economy in the euro area has turned around. While GDP stagnated during the second half of 2001, there are more and more signs that output will increase considerably in the first half of this year. All in all, the slowdown has not been very pronounced. One indication for this is that in 2001, the year of the downturn, unemployment remained more or less constant. The factors which led to the cyclical slowdown have turned around and now stimulate economic activity: Monetary policy has become expansionary, oil prices have dropped substantially, and there is a recovery in the rest of the world. Key interest rates in the euro area have remained unchanged since early November 2001. Real short-term interest rates are well below their historical average. Therefore, economic activity is stimulated by monetary policy. Until spring 2003, the ECB will raise key interest rates to the neutral level which should prevail when the output gap is closed and when inflation is at its target; this neutral rate lies between 4 and 4.5 percent. Money growth has exceeded the reference value of 4.5 percent for M3 considerably for several months. This increase implies that the velocity of money shows an unusually large deviation from its trend. According to the judgment of the ECB, the demand for M3 has become unstable only in the short run due to special factors. If this judgment is correct, money growth will slow down markedly in the coming months. As a consequence, velocity will return to its trend without an increase in inflation. This implies, however, that the expected slowdown of money growth should not be used as an indication that monetary policy is tight and needs to be loosened because the deceleration of M3 growth is nothing but a normalization. Fiscal consolidation has been insufficient in several countries. Governments in Germany, France, Italy and Portugal should begin to pursue a strict consolidation course. Empirical evidence shows that countries that undertook credible consolidation strategies based on expenditure cuts did not experience cyclical downturns. If the governments of these countries were to dampen the increase in government spending, there would be room for a reduction of the tax burden and of budget deficits. This would improve the growth perspectives for the medium term. In 2001, wages in the euro area increased somewhat faster than in the previous years largely reflecting the improvement of the labor market situation due to the strong upswing. Also, employees tried to limit the reduction of real wages, which was the consequence of the higher than expected rate of inflation. In our forecast, wage increases will average about 3 percent both this year and next. This implies that there is room for an increase in employment although it is smaller than at the end of the 1990s. Nevertheless, the development of wages does not imply a risk for price level stability. The leading indicators suggest that the European economy has reached its trough in the first quarter of 2002 and that the upswing is imminent. From spring on, real GDP will increase at a faster pace than potential output. On average, it will increase by 1.7 percent in 2002. In the course of the coming year, the increase in production will gradually slow down. The upswing in the world economy will probably pass its peak in the first half of next year implying a less dynamic external demand for European products. Domestic demand will also lose some momentum. This is due to the fact that monetary policy will return to a neutral course and that the effects of the preceding easing will gradually fade. We expect real GDP to increase by 3 percent in 2003. --

European economic outlook : general report presented at the AIECE meeting in Paris, May 9 - 11, 2001

In the spring 2001, the world economy is in a delicate situation. The vigorous growth momentum that prevailed in the recovery in 1999 and into 2000 is clearly gone. In the second half of 2000, global growth decelerated rapidly. In contrast to the last downturn of the world economy in 1997/98, the deceleration originated in the industrial countries, where growth rates were more or less cut in half compared to the first half of the year and the OECD leading indicator declined rapidly (Figure 1.1). Major factors behind the slowdown were lagged effects of monetary tightening and the pronounced and sustained rise in oil prices. It has to be noted, however, that the loss of momentum was substantially larger than expected by most forecasters, including the AIECE institutes in fall of last year, although oil prices behaved largely as expected. The deceleration of activity was particularly pronounced in the IT sector, and the substantial weakening of demand for electronics equipment and IT consumer goods went in tandem with a dramatic decline in the price of tech stocks on a global scale. Indications that the global economy is at the brink of recession are, however, not conclusive. In most countries, business climate and consumer confidence indicators are still at relatively high levels despite the fact that they have fallen over recent months. This is true even in the United States, where the deterioration of indicators has been most pronounced, at least as consumer confidence is concerned --

Euroland: Upswing postponed

The recovery in Euroland has started at the beginning of this year but it has remained rather moderate. Real GDP increased at an annual rate of less than 1½ percent during the first half of 2002. Capacity utilization has declined further and unemployment continued to go up. While exports have gained some strength, domestic demand has just about stabilized. Against the background of weak economic activity the increase in consumer prices has calmed down considerably. Several factors can be made responsible for the sluggish economic performance. Consumer sentiment was affected by the price increases at the beginning of this year and obviously also by the introduction of the new currency. Profit expectations of firms have not improved sufficiently as it is also reflected in the collapse of stock prices. In addition, export expectations have deteriorated recently because of the uncertainty about the US economy and the appreciation of the euro. In the light of the recent turbulences on stock markets and the increased uncertainty about the economic outlook in the euro area, the ECB will probably not raise interest rates this year as was expected a few months ago. In fact, there is a discussion whether the ECB would — or even should — lower interest rates. According to both pillars of its monetary policy strategy, an easing of monetary policy cannot be justified. Money growth still exceeds the reference value by a wide margin. Although our analysis indicates that money demand has become unstable recently, there is a risk that there is some excess liquidity in the euro area and that the high money growth cannot be explained by special factors alone. The perspectives for price level stability have also not improved considerably. The budget deficit in Portugal and also in Germany will probably exceed 3 percent of GDP this year; in Italy and France it is approaching this level. The European Commission has started the excessive deficit procedure for Portugal and may do the same for Germany soon. However, it is not certain there will be the necessary majority in the ECOFIN Council for the decision whether an excessive deficit exists. One cannot exclude that Italy and France have an interest to block such a decision because they also have problems of meeting the obligations of the Stability and Growth Pact. So it is possible that the finance ministers of these four countries which together have 35 votes in the Council will prevent the decision about the excessive deficit procedure. The coming months will show whether the Pact really has teeth. We are strongly in favor of a strict application of the Stability and Growth Pact. The recent deterioration of consumer and business sentiment does not, in our view, imply that a renewed downturn is imminent. After a relatively sluggish growth in the rest of this year, economic activity will pick up considerably in the course of 2003 and real GDP will rise faster than potential output. For the year as a whole, real GDP will increase by 2.3 percent, after 0.8 percent in 2002. The labor market situation will improve slowly in the course of next year. Inflation will remain moderate also because the ECB will tighten monetary policy gradually; in addition we expect that wages will rise only moderately. The consumer price index will increase by 1.6 in 2003, after 2.1 this year. --

Gradual recovery in Euroland

The economic situation in the euro area continues to be weak. In the course of 2003, real GDP has only stagnated. Several factors prevented the expected recovery to materialize. Last year’s collapse of stock prices dampened activity, so did the high oil price. In addition, the uncertainty in the wake of the conflict with Iraq had a negative impact on the business sentiment and on consumer confidence. Finally, exports were hit by the strong appreciation of the euro. Since the spring of 2003, leading indicators have improved somewhat, but they do not suggest that economic activity will pick up strongly in the second half of this year. All in all, real GDP growth will amount to just 0.5 percent in 2003 and, thus, remain below the trend rate for the third year in a row. In the course of next year, economic activity will accelerate gradually; beginning in the spring, overall capacity utilization will increase again for the first time in three years. One factor supporting the recovery will be exports as growth in the world economy will gain momentum and the dampening factors of the euro appreciation will phase out. Internal demand will be stimulated by low interest rates; investment of firms will pick up, and also consumers will become more optimistic as the labor market situation will slowly improve. For the year as a whole, we expect real GDP to rise by 1.9 percent. Consumer price inflation will remain moderate and be in line with the target of the ECB. The European Central Bank (ECB) will leave key interest rates at their low levels for the time being. If the economy starts to recover in the fourth quarter of this year, as we expect, there will be no reason to loosen the policy stance further. The ECB will most likely start to tighten policy when the upswing has gained momentum and capacity utilization has increased considerably. Therefore, it is not likely that interest rates will already be raised next year. The budget deficits in most countries will again be higher than anticipated in the national Stability Programs. For the year as a whole, the aggregated deficit in the euro area will rise to 2.6 percent in relation to GDP, compared to 2.2 percent last year. Next year, the stance of fiscal policy will be roughly neutral with differences among the member states. The budget situation in Germany is a major cause for concern. Already last year, the deficit exceeded the 3 percent limit of the Stability and Growth Pact (SGP). The same will be true for this year. The current plans for 2004 make it very likely that the deficit will exceed the 3 percent margin once again. A similar scenario can be expected for France, where the announced measures will not prevent the deficit to reach more than 3 percent for the third year in a row. Several governments are acting against their own announcements by allowing excessive deficits to persist. That is in clear contradiction to the Broad Economic Policy Guidelines (BEPG), which call for a continuous reduction of structural deficits. By violating these rules and also the commitments made in the context of the Stability Programs, fiscal policy is losing credibility. Should the Stability Pact fail, it would not be because of its “tight rules” but because governments fail to comply with the rules which they have established themselves --

Moderate upswing in Euroland

Economic activity in the euro area is recovering. In the second half of 2003, real GDP grew at an annualized rate of roughly 1½ percent. In contrast with other large industrialized countries, economy-wide capacity utilization has not yet increased. Private consumption has remained the major weak point. However, private investment has increased for the first time since 2½ years and exports have risen rapidly, stimulated by the strong upswing in the rest of the world. A number of leading indicators suggest that the recovery in Euroland has gained some momentum since the turn of the year. Despite an expansionary monetary policy and the dynamic world economy, real GDP in the euro area will rise only moderately in comparison with earlier upswings. This is due to two factors. First, potential output growth in the euro area has apparently decelerated. Second, fiscal policy especially in the large euro-area economies is not sustainable. As governments do not have a credible consolidation strategy, the tax burden is likely to increase in the coming years. Against this background private households? income prospects are subdued and, as a consequence, private consumption will remain comparatively weak. The appreciation of the euro has had a considerable effect on economic activity, but it will not stop recovery. The results of our macroeconometric model imply also that the effects will be small in 2005 if, as we assume, the euro/ dollar exchange rate remains unchanged. Some observers urge the ECB to react to the strength of the euro by cutting interest rates. Whether the ECB should do so depends solely on the way in which the appreciation of the euro impacts the targets embedded in its monetary policy strategy. The main issue is whether the appreciation of the euro will push the inflation rate considerably below the target value. Past experience suggests that it would be unwise to assume it will have a strong dampening effect on consumer prices. Since the beginning of monetary union inflation forecasts have usually been too optimistic. All in all, the ECB is well advised not to cut interest rates in response to recent exchange rate developments. Interest rates in the euro area are already unusually low and stimulate economic activity. The Stability and Growth Pact requires the governments in euro-area countries to achieve a balanced budget or a budget surplus in the medium run. The main problem at present is not that budget deficit to GDP ratios are higher than 3 percent in some countries, but that structural deficits are also very high. Seven years after the adoption of the Pact the large countries still have made no progress on the way to a balanced budget. In Germany and France the structural deficits are even higher than before the monetary union. The recent Stability Programs of these countries suggest that the balanced- budget target has been given up altogether. This is eroding the credibility of fiscal policy and constitutes a heavy blow to economic stability in the euro area. Unsound fiscal policy negatively affects expectations in the private sector and is likely to result in a further deceleration of potential output growth. --

Euroland: recovery will slowly gain momentum

Economic activity in the euro area has weakened since last summer. In the second half of 2002, real GDP increased at an annualized rate of around 1 percent only. Economy-wide capacity utilization has further declined and the situation on labor markets has worsened. The increase in consumer prices has calmed down somewhat after an acceleration at the beginning of last year. Still, the inflation rate remains surprisingly high against the background of weak economic activity that has already lasted for two years. Monetary policy in the euro area is clearly expansionary. With only about 0.5 percent, the real interest rate is currently quite low by historical standards. Moreover, the nominal interest rate is well below the rate implied by the standard Taylor rule, even when low estimates of the current size of the output gap and the equilibrium real interest rate are employed in the calculation of the rule. Still, monetary policy is probably not too expansionary. According to theory, the equilibrium real interest rate may be substantially below the long-run average real interest rate in situations such as the current one with depressed income and profit expectations. However, these considerations also imply that the ECB should bring the real interest rate back towards the long-run average once the depressing factors will have vanished. The situation of public finances in the euro area deteriorated further in the course of last year, with the aggregated budget in the countries of the euro area approaching a deficit of 2.3 percent of GDP in 2002. The cyclically adjusted budget deficit in the euro area was as high as in 1998, the year immediately before the beginning of the third stage of the Economic and Monetary Union. Whereas most countries have in the meantime complied with the goal of the Stability and Growth Pact to at least balance the budget over the medium term, the budget deficit in Germany, France, Italy and Portugal remained high both in actual and in structural terms. The governments of the three largest countries of the euro area are not likely to switch towards a policy of fiscal consolidation based on cuts in primary spending in 2003 and 2004. Moderate wage settlements would be appropriate in the current cyclical situation. However, wage increases have not slowed down over the past year, and are not expected to do so to any meaningful extent this year and next, reflecting the judgment that labor market rigidities will remain significant over the forecast horizon. Nevertheless, as employment is likely to be slow in responding to a recovery in production, the rise in unit labor costs will decelerate considerably, improving the chances that inflation will fall persistently below 2 percent. The leading indicators suggest that economic activity in the euro area will remain weak in the first half of this year. Under the assumption that the war in the Gulf region is of short duration and that the global political situation calms down afterwards, dampening factors from the Iraq conflict are expected to wane. Impulses from expansionary monetary policy will then increasingly take effect and domestic driving forces will gain the upper hand. We expect real GDP to increase by 1.0 percent and by 2.6 percent in 2003 and 2004, respectively. The situation on the labor market will start to improve towards the end of this year only. Inflation will be moderate over the forecast horizon. In 2004, consumer prices will probably rise by 1.9 percent on average, after 2.2 percent this year. --

Laser Wire Scanner Compton Scattering Techniques for the Measurement of the Transverse Beam Size of Particle Beams at Future Linear Colliders

This archive summarizes a working paper and conference proceedings related to laser wire scanner development for the Future Linear Collider (FLC) in the years 2001 to 2006. In particular the design, setup and data taking for the laser wire experiments at PETRA II and CT2 are described. The material is focused on the activities undertaken by Royal Holloway University of London (RHUL).Comment: 61 page