Basically, nothing fundamental. An oil and gas hike hurt. The dollar rose against the euro about 25 percent. The Fed raised interest rates some 2 percentage points–hardly enough to kill a boom. Meanwhile, employment is still rising. U.S. economic authorities have time and leeway to act. Tax cuts are coming. So I do not share the panic. If the airship U.S. Economy has lost altitude, it has not sunk as much as pessimists claim–and, indeed, seems poised to gain height during the second half of 2001. That’s good news for America. It’s even better news for Europe.
Once upon a time, the conventional economic wisdom could be summarized: when America catches the flu, Europe comes down with pneumonia. No more. Europe will escape an American “contagion,” modest as it may be. Yes, we’re feeling the U.S. slowdown. We’ve cut estimates of Europewide growth from 3.4 to 2.5 percent. But for a variety of reasons–signifying a fundamental change in transatlantic economic relations–Europe has over the decades increasingly “delinked” itself from dependency on America. Big corporate tax cuts across Europe, most especially in Germany, will be worth three quarters of a percent of GDP growth this year. Compared with America, European companies are healthier, costs are lower and earnings are steadier. The low euro makes exports more competitive, highlighting the fact that Europe is less dependent on the U.S. market than ever before. About 60 percent of western Europe’s trade is internal. Eastern Europe since the cold war has come from nowhere to be one of our biggest trading partners. Britain and Ireland, which used to trade mostly with the United States, are now integrated into the Euro-economy. Europe today is remarkably free of what goes on in America; it will be even more so in the future.
Delinkage is relative, of course. Europe’s bourses still track the United States’. Broad market drops have been almost identical, even in terms of daily trading volatility. That’s a big surprise, since for two quarters we’ve had substantially divergent economic conditions. I suspect that will change after another two quarters of stronger European growth, particularly if U.S. interest rates decline further than those in Europe. That should boost both the euro and stocks. I also expect Europe’s New Economy to mirror America. The United States was initially more prone to excess, partly because of these companies’ early and easy access to venture capital. But by late 1999, with Europe’s new technology stock markets and an explosion in venture capital, we saw the same hype. Still, both east and west of the Atlantic, we should remember Mark Twain’s admonition: reports of my death are exaggerated.
