U.S. not facing long recession: Mundell

Reuters, Frankfurt

The U.S. economy is not plunging into a long recession and will recover on the strength of investment and spending, Nobel prize-winning economist Robert Mundell said in a newspaper interview published on Thursday.

"We are not on the edge of a long and difficult recession. This won't be worse than the one at the beginning of the 1990s, in any case," Mundell told the Frankfurter Allgemeine Zeitung.

U.S. growth contracted for eight consecutive months from July 1990 to March 1991 in its only recession of the decade.

Recovery will be underpinned by investment and spending, which "look pretty good, thanks to stable housing construction, and the reason for that is low interest rates," he said.

Asked about the causes of the recession, Mundell said U.S. monetary policy had been too tight in the period leading up to the growth slowdown: "Greenspan did not act very wisely".

But he said that the main reason was the bursting of the speculative financial bubble in the technology sector.

Mundell said the U.S. government's tax cut plans were incorrectly laid.

"Instead of cutting income tax, a reduction of the corporate income tax rate to 20 percent from 35 percent now would have been appropriate."

Mundell also lent his support to the argument that the euro may come under selling pressure ahead of the launch of euro cash as foreign holders of euro zone currencies buy dollars.

Asked how low the euro might sink in the event of a long recession in Europe, Mundell replied: "If the euro were to fall under US$0.85, it would be a disaster. It would cause immense damage to the whole European economy."

"I would advocate holding the dollar and euro in a band range of $0.85-$1.15."

He was also critical of the European Central Bank's two-pillar monetary strategy, which follows both monetary supply as well as real economy indicators, which Mundell characterized as "schizophrenic."

But he had some sympathy for the task of ECB President Wim Duisenberg, who is much criticized in the media for weak communication skills.

"Duisenberg is not worse than (Fed chairman) Alan Greenspan. He doesn't have as much experience in dealing with the public. But his task is also more difficult, he has to battle with 12 different countries," Mundell said.