Mon, 01 May 2000

U.S. teaches Europe economic reform

By Stefan von Borstel

WASHINGTON (DPA): The economic upsurge in the United States is calming down gradually. Gross domestic product (GDP) grew by an annual rate of 5.4 percent, the Department of Commerce said in Washington last Thursday, as against GDP growth of 7.3 percent in the last quarter of 1999.

America's economy thus seems to be getting set for the long- expected soft landing. The U.S. Federal Reserve has been tightening its monetary policy distinctly in recent months for fear of overheating.

It increased the Fed Funds rate for the fifth time in a row at the end of March. At six percent, the U.S. key rate is clearly above that of Europe which the European Central Bank (ECB) raised by 25 basis points to 3.75 percent last Thursday.

The strong U.S. growth is considered one of the major reasons for the continuous slide in the exchange rate of the euro, apart from the rate spread between Europe and America.

Investments in the U.S. promise higher yields than in Europe; capital is drawn out of the old continent and invested in the new world.

The U.S. economy is experiencing the longest growth phase in its history. February was the 108th month of uninterrupted growth. This surpasses the previously longest -- from 1961 to 1969 -- which was promoted mainly by the high spending for the Vietnam war.

The American success story was considered almost ended in the early 1990s. The dollar was weak, unemployment and inflation were high. The coming era should belong to the disciplined Japanese, economists felt then, and Europeans were arming themselves for the future with a single domestic market.

Today Europeans and Japanese alike are viewing with envy the U.S. economic miracle which they would like to copy. This is likely to be tough to do, however, because there are two particular reasons for the steady economic growth.

Firstly, the flexible, venturesome U.S. economy is better equipped for the challenges of the new technologies and globalization than the welfare states of continental Europe.

Secondly, the Americans have long completed the reforms which only now are being started hesitantly in Europe. As Munich-based political scientist Stephan Bierling writes, high flexibility, rapid availability of risk capital and a liberal system of regulations enable U.S. companies to react quickly to changes and to penetrate new markets.

Indeed, the United States is market leader directly in those sectors in which innovativeness and creativity are in high demand -- and thus there where the best growth prospects exist. Telecommunications, computers, the Internet, biotechnology and media; the model companies of the economic miracle are Bill Gates's software giant Microsoft, major global online services provider AOL or Internet companies Yahoo and Amazon.

But policymakers also made their contribution to the boom. The Americans liberalized their telecommunications and civil-aviation sectors way ahead of the Europeans. The inland revenue system was reformed and relief provided for ordinary citizens during the era of president Ronald Reagan (1980-1988). Bill Clinton certainly is to be credited with having resolutely opened his country to globalization. Whereas foreign trade had only a ten percent share of U.S. GDP in 1970, it currently stands at one quarter.

America's successes in budget consolidation are most marked -- in stark contrast to Europe. When Clinton took office, the budget deficit was US$290 billion. He is likely to record a $184-billion surplus in his final year of administration this year.

In Germany, Finance Minister Hans Eichel has just initiated the about-face in fiscal policy but many consider as over- ambitious his aim to present a balanced budget by the year 2006.