Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!news.media.mit.edu!americast.com!americast.com!usa-post Newsgroups: usa-today.bonus,americast.usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Mon, Sep 21 1992 Date: Mon, 21 Sep 92 04:39:57 EDT Message-ID: 09-21 0000 BONUS: Global growth still anemic USA TODAY Update Sept. 21, 1992 Source: USA TODAY:Gannett National Information Network France's narrow approval of a European unity treaty may help calm global currency markets, but it won't solve the real problem: Every major industrialized nation's economy is struggling, and there is no sign that any will gain strength soon. "Recessions are rolling around the world," says Brian Wesbury, chief economist at Chicago investment-banking firm Griffin Kubik Stephens & Thompson. "It's like a scary game of dominoes with every economy taking its turn to fall." WHAT HAS RESULTED FROM THESE SHAKY ECONOMIES? Shaky economies are a major reason for the crisis that erupted in Europe last week. Faced with troubles at home, global leaders aren't coordinating their fiscal and monetary policies. Germany, for example, has been driving up interest rates, while the USA has been lowering rates to boost its sluggish economy. That's made it tough for many European nations to control exchange rates for their currencies, which are supposed to be linked to the German mark. HOW DID EUROPEAN COUNTRIES REACT? Last week, the system snapped. Great Britain's Bank of England was forced to abandon its attempt to defend the pound by jacking interest rates higher. Higher rates were strangling the British economy. Italy, too, was forced to let its currency, the lira, find its own level in the currency markets. While the French vote may ease the European crisis, economists say something much bigger is needed to solve the world's problem: a return to global economic growth. But nobody knows when - or how - that will happen. WHAT EFFECT WILL THIS HAVE? What has caused the economic malaise around the world, and what affect might the currency crisis have on it? The USA's woes are well-known: a $4 trillion federal debt, low consumer confidence, leftover bills piled up in the '80s by individuals and businesses. Japan has similar problems. Speculative bubbles in real estate and stocks, pumped up in the '80s, have burst, slowing economic growth. WHAT HAPPENED IN EUROPE? In Europe, a major source of economic pain has been Germany's fight against inflation. Until last week, high German interest rates forced other EC members to raise their rates so their currencies would remain stable against the mark. HOW IS GERMANY REACTING? With the dominant economy in Europe and third-largest in the world behind the USA's and Japan's, Germany is struggling with the costs of uniting what were West Germany and East Germany. Just two years ago, those costs - for rebuilding roads, shutting outdated factories, supporting unemployed East Germans and selling off former state-owned businesses - were expected to total $70 billion over five years. Now, costs are running near $100 billion a year. HOW IS GERMANY PAYING? To pay those bills, the German government has chosen mostly to borrow rather than raise taxes. That borrowing has pushed up long-term German interest rates. The Bundesbank, Germany's central bank, has pushed short-term rates even higher to keep public spending from fueling inflation. Although the Bundesbank cut rates slightly Monday, short-term German rates still are more than 6 percentage points higher than in the USA while inflation is running at about 3% in both countries. "I don't think (Germany is) on the brink of a recession," says Joe Prendergast, Frankfurt-based economist for consulting firm MMS International. WHAT IS HAPPENING IN THE UNITED KINGDOM? "Britain's major problem now is that the consumer is absolutely dead," Prendergast says. That means little or no growth in spending on goods and services. Behind the meltdown: a collapse in property values that has seen home prices and prices of many commercial properties fall as much as 20% from just two years ago. High interest rates have crippled the British real-estate market. Also hurting the United Kingdom: slow growth elsewhere, which is damaging exports. British investors hope the floating pound will pave the way for lower rates. AND FRANCE'S REACTION? The major drag on the French economy, experts say, has been the government's franc-fort policy: the use of relatively high interest rates to keep the franc from falling against the mark. On average, French short-term rates have been running nearly 4 percentage points above U.S. rates. One result is that slow economic growth has kept the nation's unemployment rate slightly above 10%. HAS ITALY'S REACTION BEEN SIMILAR? As elsewhere, the major force hurting the Italian economy has been interest rates, kept high in an effort to shore up the lira. Huge budget deficits also are keeping rates high. Last year, the Italian government was $120 billion in the red. That's equal to a whopping 12% of Italy's gross domestic product. The USA's deficit as a percentage of GDP: 6%. WHAT'S AHEAD FOR THE WORLD'S BIG ECONOMIES? More slow growth, economists say, because consumers in so many nations are shell-shocked. But the European currency crisis actually might boost growth in the next few years if it allows the major countries - including Germany - to push down interest rates. Sunday's French vote in favor of the Maastricht treaty should keep the drive toward European unity alive, even if some countries, such as Great Britain, decide to stay out of the new system. WHO ELSE WOULD BE HELPED? Stronger growth in Europe wouldn't only help nations there. Exporters from the USA, Japan and elsewhere would reap big benefits if Europe buys more of their goods and services. But Europe still faces long-term obstacles. If the EC nations can't form a solid bloc with a single currency, "they will have given up potential gains" that would spur economic growth five or 10 years from now, Prendergast says. Businesses that have been investing in Europe could grow cautious. That could hurt the USA. But unless the EC flies apart European cooperation will continue, at least to some extent. Most trade barriers within the EC, for example, still are scheduled to come down at the end of the year. DOES EVERYONE AGREE WITH THIS ANALYSIS? Some analysts take a darker view. "What we're seeing is tribalism and nationalism surging around the world," says Gerald Celente, director of Trends Research Institute. "That's going to mean protectionism and trade barriers everywhere. And that means we could be setting the stage not just for a global recession but for another great depression." HOW HAVE WORLD LEADERS REACTED? The world's leaders seem paralyzed by the crisis. After meeting in Washington, key officials from the seven major industrial powers issued a bland, three-paragraph statement that offered no concrete steps to cope with the global slump. Some observers say the crisis could work out for the best - at least from a U.S. perspective. But other experts say that's wishful thinking. Warns David Calleo, a professor at Johns Hopkins University. "We're all in this together." Bonus Editor: Kate Coughlin. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. This article is copyright 1992 Gannett News Service. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM