Fuelling the Union’s economic fire

Date: 06/10/05

Although the IMF is spending more time and more money in the developing world, it still plays a major role in helping European Union countries understand the global economy. Stewart Fleming talks to Michael C. Deppler, the Fund's European director, about the state of Europe's economy and the global challenges ahead

The International Monetary Fund (IMF), part bank, part economic policy think-tank, has a reputation for fire-fighting. In the 1960s and 1970s, it was officials from the IMF who would be dispatched to tell the UK or France or Italy how to get out of their frequent economic crises.

Since the 1980s, the IMF has been spending more of its time and money in developing countries and emerging market economies.

But Europe, an economic giant which rivals the US in global influence, is not forgotten. One of the IMF's roles, in an increasingly integrated global economy, is to help governments and central banks in Washing-ton, Beijing, Frankfurt or Tokyo, understand how what is happening in their countries will affect other parts of the globe and feed back into their own economic performance.

Partly with this economic surveillance role in mind, economists from the IMF's 170-strong European department are regularly visiting counterparts in European capitals. Every couple of months, too, Michael C. Deppler, the 62-year-old French-speaking, Brazilian-born American who is the department's director, also crosses the Atlantic, to take the continent's pulse.

"I would be reasonably optimistic that there is a recovery out there for the eurozone," Deppler, says, rejecting suggestions that the economic cycle might no longer be operating in Europe.

"From 1995-2000, the eurozone had quite a sustained expansion. It grew at around 2.5%. Around 12 million jobs were created in ten years, on a par with the job creation record of the United States. And today, with the exception of Germany, in most countries unemployment levels are distinctly lower than past highs at this stage of the cycle."

Deppler points out, too, that it should not be surprising that, after the "huge boom and over-investment" in 2000, followed by a "huge bust which saw corporate investment decline for nine successive quarters", it has taken time for companies to start investing again. The IMF's models of short-term economic indicators sug-gest that eurozone real growth in the third quarter has been running around 1.5% and a higher figure looks likely for the fourth quarter, he says.

The IMF, in its new World Economic Outlook, has lowered its forecast for the eurozone in 2006 from 2.3% to 1.8%. Deppler agrees that there are risks from the oil price rises.

After all, he says, "the eurozone has recently suffered two aborted recoveries, one in 2003 and then again in 2004". But he does not subscribe to the view that the cumulative rises in oil prices and, recently in the US, interest rates, have brought the world and therefore the eurozone economy to a "tipping point" and a swift and brutal end to the recent recovery is imminent.

The IMF, Deppler says, has made no secret of its concerns about the "global imbalances", notably the unsustainable &036;700 billion and rising US current account deficit.

"There is no question from our analysis that the euro area is one of the regions most vulnerable to a disorderly correction of the US exchange rate," he says. One reason is that, on recent evidence, if the dollar slumps it is the single currency which will soar, making Europe's exports more expensive. In addition Europe does not cope well with unexpected economic shocks.

From the Fund's point of view there is a strategy out there to avoid a "disorderly correction" of the im-balances - in everyday language a dollar crash and a global recession.

"The Fund," says Deppler, "has a clear line on global imbalances. The US needs to cut its fiscal deficit, Asian countries [he does not name China but the implication is clear] need flexible exchange rates and Europe and Japan need to press ahead with structural reforms. We need credibility in each of these domains to reassure financial markets that in a reasonable span of time the imbalances are going to unwind smoothly."

"In Europe's case there is a concern about the lack of a longer-term vision. There are long-term issues in Europe, the low employment rates, the ageing of the population that lies ahead.

"And there is great uncertainty about what governments intend to do about these issues, and this helps to explain why consumers and in-vestors are being careful," he says. "Countries also need to have strategies to deal with the globalisation phenomenon, to deal with the bumps in the road that come along."

• Stewart Fleming is a freelance journalist based in Brussels.

Interview with Michael C. Deppler, the International Monetary Fund's European director, touching upon the state of Europe's economy and the global challenges ahead.