September 3, 2003

Worried about Europe.  Have you been watching the recent developments, or lack of them, in the European economy.  What a mess.  The French unemployment rate is around 9.5%.  The unemployment rate for those less than 25 years of age in France is 20.6%!  These are the highest unemployment rate France has seen since May 2000.  The unemployment rate in Germany is also around 9.5%.  By comparison the U.S. unemployment rate is 6.2%.

Further clouding the European picture is the growing government budget deficits.  Both France and Germany are probably going to have government deficits greater than the 3% of GDP that is allowed under the Growth and Stability Pact.  According to the Pact there are suppose to be huge fines levied against countries that have deficits greater than 3% of their GDP.  The Germans wanted this Pact as a way to keep the Italians, and others, to toe a conservative fiscal line.  No one ever thought it would be Germans that would be the violators.

Then there is the Euro-zone inflation.  The European Central Bank has an explicit inflation goal:  2% annual rate.  Well…in August the annualized rate was 2.1%.  Some of this can be blamed on high energy and food prices due to the European heat wave and drought.  Okay, but it still suggests that the ECB is unlikely to pursue an expansionary monetary policy any time soon.

 So if you are Europe what do you do?  Expansionary fiscal policy is out of the question due the large government budget deficits they already have and expansionary monetary policy is doubtful due to the inflation worries.  Hmmm…can you say “falling Euro?”

 

Watching Brazil.  Brazil is such an interesting place.  At the beginning of the year American financial markets were all writing Brazil off as a former labor leader Luiz Inacio Lula da Silva was elected President.  The dooms day scenario was that this uneducated former machinist would turn into another Chavez, the nutcase that is ruining Venezuela.  But as is so often the case with Brazil, the American financial markets got it wrong.

Lula did not nationalize industries.  He didn’t turn into a big spending populist.  Instead he has worked to reform Brazil’s crazy pension plans and is currently fighting with Congress to reform the Brazilian tax code.  Some of the more difficult issues may be put off to later, but Lula said he expects to secure final approval from Congress on both the social security and tax reforms by October or November.  Pretty impressive.

The current status of the Brazilian economy is not that great, which may help Lula’s call for reform.  The Brazilian economy slid into a recession during the second quarter as output shrank for the second straight quarter, falling a seasonally adjusted 1.6% in the April-to-June period from the previous three months.  But looking more closely does offer signs to be optimistic.

The slowdown was caused, in part, by a contractionary monetary policy that was needed to head off inflation.  With that job now down, interest rates in Brazil will probably be falling.  Lower interest rates, inflation under control, more sensible fiscal policies, hopefully a reduction in government corruption (another Lula promise) and one can see reasons to be optimistic about Brazil’s future.

 

Blogs.  Thanks to Adam Weinroth and the people at Austin-based easyjournal.com I now have my own blog.  If you are not familiar with blogs they are sort of a combination of electronic bulletin boards and emails.  They are very popular among tech savvy young people, of which I am not one, but Adam thinks it may be a great way for academics to share their ideas with the outside world.  I am going to use my blog as a place where I can sound off about economic issues that get under my skin.  The Macro Updates will continue to focus on economic issues that impact managerial decision making, and my blog will be more free form where readers can post their thoughts.  If you are interested take a look at my blog at http://brandl.easyjournal.com   to learn more about blogs see this story from the Austin American Statesman:  http://www.statesman.com/business/content/business/081103/0811blog.html

All the best,

MB