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As expected, the ECB chose to leave its target interest rate unchanged at 3.25% at its meeting last week. And the cautious tone taken by ECB President Wim Duisenberg on the risk from the oil-price spike and the outlook for interest-rate hikes is encouraging. On April 4, Duisenberg said that "if the recent rise in oil prices continues, there will be risks to both the inflation and growth outlook. But that's a big if." He also noted that the current level of interest rates are "appropriate with the maintenance of price stability over the medium term." Duisenberg expects that the European CPI inflation rate will continue to fall, and this appears to be the right expectation. The euro has stabilized, and there is deflation at the producer price level, with the PPI index falling for the fifth consecutive month. However, there are important differences between Europe's recovery and the one in the U.S. Even in recession, the U.S. was operating at relatively full employment and consumer confidence was on the rise. In contrast, Europe hasn't yet declared a recession, but suffers an 8.4% unemployment rate, weakness in consumer confidence, and a reliance on exports for business confidence and growth. This argues for a sluggish recovery unless the U.S. has an outright boom, which doesn't seem likely. Other indicators that lean toward a soft recovery in Europe include: German factory orders fell 1% month-over-month in February, after a 1% decline in January. France recently reported that consumer confidence had fallen back to its five-month low. And in March, new car registrations (the equivalent of sales) fell by18.4% (year to year) in Italy and 5.3% in France. In Germany, new car registrations declined by 1.2% year to year in February. Looking ahead, the French presidential election — which is still too close to call — will have market significance. A win by Prime Minister Lionel Jospin (Socialist Party) over President Jacques Chirac (Republic Party) would alter the 1995-2002 power-sharing between the main parties, whereas a Chirac victory will leave the status quo relatively intact. Some important election-related market issues include: the impact on Jean-Claude Trichet becoming president of the European Central Bank in mid-2003 (which would be decidedly market-positive); France's interaction with the European Union over regulatory harmonization issues relating to cross-border investments, mergers, and labor flexibility; France's privatization efforts; and whether the French government moves to sell some of its extensive equity holdings. But overall, the
fact that interest rates will remain stable is some good news at the right
time for both the European and global economies. — Mr. Malpass is the Chief International Economist for Bear Stearns.
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espite
a spike in oil prices, you can expect a mild recovery to continue in Europe,
with the European Central Bank delaying interest-rate increases longer
than the market now expects.
