AT THE World Economic Forum in Davos in January 2001, the mood was sombre. The dotcom bubble had burst spectacularly, the Nasdaq stockmarket had crashed, and the American economy was tipping into recession. Yet most continental Europeans were breezily optimistic. The long years of being lectured about their inadequacies by the Anglo-Saxons were over.
Seven years on, the parallels are uncanny. Continental Europe has sensibly avoided America's subprime follies, it is argued. Its banks are in better shape, average euro-area unemployment of 7.1% is the lowest in almost 20 years, the euro is resurgent and, as Joaquín Almunia, the engaging European economics commissioner, insists, there is no sign of a recession. The commission will trim its forecasts later this month, but euro-area growth is likely to stay close to 2% this year. It is true that the European Central Bank (ECB) in
Just as in 2001, however, the outlook for the euro area seems to be deteriorating a lot faster than the optimists had expected. After all, the main reason that the ECB has been reluctant to cut rates is not because growth is so robust but because inflation has picked up to 3.5%—the highest in the euro's nine-year existence. Troubles in the region's two biggest export markets—recession in
And two bigger worries have emerged. The first is the strength of the euro. A weaker dollar is driving an American export boom; a stronger euro is likely to have the opposite effect in
The second worry is the housing market. Europe may have avoided the American subprime mess, but in several countries house prices have been even bubblier than in
Indeed, Mr Almunia's home country of
The political fallout will be felt in other ways too, because of the differential performance of euro-area economies. Mr Almunia admits that
The dark face of success
Even critics of the euro would concede that it has had considerable success, establishing itself in less than a decade as a genuine rival to the dollar as a world currency. But that success disguises two failings. The first is that some countries have adapted a lot better to the discipline of the euro than others.
The second failing is an ironic flipside of success. To qualify for the euro in the late 1990s, countries such as
In truth, as the euro approaches its tenth birthday celebrations, it is facing the biggest test of its short life. If Europe follows America into recession, which is quite possible, the pain will be a lot greater in the Mediterranean countries than in
Fuente: The Economist