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Forecast IEE #7 (46). Europe: simultaneous growth of risks and sociopolitical pressure

The discount rate increase undertaken by the European central bank (ЕCB) in 2006 will cause the risks growth in the incorporated Europe economies and, first of all, in the economies of its leaders. By economic reaction, at the beginning of the year ЕCB with its establishment has hurried at the level of 2, 5 %. As a result, economic dynamics demonstrates the mix of the first positive signals and risks growth.

In 2005 the Institute of Evolutionary Economy already predicted  predicted  increase of risks in the economy of Europe .

Moreover, as evident from real situation, all these forecasts, unfortunately, were justified. However, it confirms the correctness of our forecasting model that, in turn, allows us to comment new actions of ЕCB in the same key.


Mr. Trisha’s speech (the head of ЕCB) on Thursday, April 6, 2006 makes an impression, that neither EU nor ЕCB have any precise strategy of leading the economy out from the tightened stagnation (cmp.-ec. growth less than 2 % a year). The character of the statement, which was unexpected for the market and compelled it sharply change the plans, proves this idea. In our opinion, the decision to terminate the discount rate increase is correct. Moreover, we consider that today this indicator should be below 2, 5 %. However, absence of the verified strategy of the Bank was the consequence of too sharp changes of expectations in the monetary policy - the market has already mortgaged higher rate in futures.


The market obviously has not been prepared for a demarche. The prices of Germany bonds have sharply jumped up, and by the results of the tenders the 2-year papers yield has fallen by 2.8 p.p. up to 3.269 %. Yield of 10-year bonds also lifted. Practically the markets in all continents have immediately reacted to this request.


As to the constructive strategy in cooperation with the Europeans, it is important to determinate the indicators of special attention. It seems that selected normative parameters of inflation are incorrect. Thus, the established rate of inflation (2 %) is considerably below the natural level that, in turn, implies high risks of unemployment.  

It seems that the problem of parameters of economic policy normative regulation is a weak part in the economic and political system of the European Union. Once accepted, they have been remained without change for a long time despite of changing economic situation. 

We consider, that the rate of inflation up to 5 % a year is safer for European economic dynamics, and would promote increase of activity that doesn’t destabilize the economic balance.




We consider that the overestimated exchange rate of Euro for the period of 2004-2005 stimulated the external economic expansion in European macro region. Under these conditions, the growth of supply of goods and services in the European markets has had lowering effect on prices and, as a result, has lowered the yield of the European firms and corporations. It became one of the reasons of searching the ways how to increase profitability (by merges and absorption) and yield (by transferring their capacities including China and India).

Under these conditions there was no need « to watch the inflation sharp-sighted » (often-repeated phrase by Trisha). It was important for ЕCB to find an optimum balance between the borders of monetary regulation, the rate of unemployment and the growth of the national debt where the growth of activity of firms-residents and the growth of the gross national product above 2 % a year would be the criterion of policy efficiency. In reality the countries tried to compensate weakness of monetary policy by state programs that, eventually, have led to growth of national debt and to economic stagnation.

The growth of the activity at the beginning of 2006 as we consider, is also the result of increasing exchange rate that decrease the discount rate of ЕCB in relation to the rate of ФРС. It was too little time for positive tendencies to become stronger because soon they have been subjected to uncertified actions of ЕCB again (by increasing the discount rate up to 2,5 %).  The Committee of ECB has commented these actions by growth of inflation, which has started to exceed 2 % (!?) in annual calculation.

And only at the beginning of April (as if having regained consciousness), ЕCB suddenly has sharply braked increase of the discount rate, that is from our point of view a correct decision, though it was a delay for required preliminary work with the market with the purpose of prevention of its sharp reactions.


The statement that Europeans have no effective strategy that could lead out their economy from condition of stagnation is amplified by their recent decision to increase import duties on production of light industry from the Asian euro region. Something can to Europeans be more visible, from here everything cannot be   made out. However, as our analysis shows if economic growth was outlined under the conditions of the smoothly changed exchange rate policy, protectionism is not desirable, for it cannot be made, not infringed ones own economic interests. Having protected a producer of light industry by protectionism the Europeans have damaged themselves, having substituted under additional impact of the external economic expansion their own manufacturers of long use goods, hi-tech, etc.

 The comment

Under conditions of the outlined economic growth and floating exchange rate, the reduction of the net-export does not lead to any growth of the GNP because the increased interest rate caused by the growth of demand for money (because of increased net-export), reduces the current account of the balance of payments by growth of the external economic expansion on other, as a rule, highly technological items of import.

Under these conditions, it would be better to give the Chinese and Vietnamese market of footwear, and the resources, which have liberated from it to direct on development of our own hi-tech branches. Quite the reverse, innovative strategy is the most reliable strategy on protection of the national interests.


Index of advancing economic indicators published by the Organization of economic cooperation and development (ОECD) on April 7 shows the growth from 104, 6 up to 105 - for countries G7 (the big seven). In the USA the indicator has increased from 106, 5 up to 107, 0. In the Euro zone the index of advancing indicators has increased from 107, 9 up to 108, 4. In Germany the index has grown from 111, 9 up to 112, 8.

The six-month factor of changes - the parameter least subject to fluctuations reflecting dynamics of indexes of advancing indicators - has increased in six of seven representatives. The best dynamics show Germany, Canada and the USA.

It is the positive signal testifying the revival of economic activity of the world economic and G7 countries. It would be very correct, if they directed their economic, and their investment activity, to Ukraine.

First, in Ukraine there is a plenty of work for the development of modern economic structure. Secondly, GNP of Ukraine in dollar calculation in 2005 is only a little more $ 82 billion, i.e. potential for growth is still huge.

Perfection of the structure in the economy of Ukraine, the growth of its gross national product even up to a level of the average European country, no doubt, would also improve the economy of EU, having smoothed, thus, errors both in policy of ЕCB, and in the structurally-investment and innovative policy of Ukraine.

The proof of it lies in direct correlation between the growth of economic dynamics of Germany and the growth of the rates of its direct investments into Ukrainian  economy (from $ 653, 7 million up to $5505, and 5 million in 2005). In fact, the firm Mittela invested Ukrainian economy as the firm officially registered in Germany. According to the investment obligations of its buyer, it is expected that the additional sum at a rate of half from a sale price - 24, 2 billion grn. within eight years, up to 2013, will be invested in the modernization of this metallurgical combine, the largest in Europe. Today 12, 1 billion grn. investment  is so necessary for the economy of the Ukraine and will predictably have innovative character.

Makarenko I.P.

With the participation of V.P.Kuzmenko

Institute of evolutionary economy


Posted on the website: 2006-04-08

Comments on this article:

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