Sweden: European Central Bank decision confirms fear of deflation

"A smooth transition" to the euro for Sweden is predicted by the Financial Times of June 6, if the ‘yes’ vote wins in the referendum on 14 September. But the deepening crisis of the Eurozone is not exactly making it attractive for workers – in Sweden or elsewhere. The major worry now is that the Eurozone is heading for deflation.

Sweden and the European Union

Eurozone heading for deflation

The cut in interest rates made by the European Central Bank on June 5 confirmed that the Eurozone is indeed in a deep crisis. Interest rates have not been lower in Europe since the crisis in the 30s and World War Two. In Germany’s case, short-term interest rates now are the lowest since 1875.

With warnings of German deflation, of negative growth in Italy and in the Netherlands and of zero-growth in the Eurozone as a whole, not even the ECB could avoid reacting. Up to now, the ECB has emphasised that interest rates were already on a historically low level. However, the cut from 2.5 per cent to 2 per cent, while being the biggest cut so far by the ECB, was expected. Some economists immediately criticised it as too little, too late. The ECB boss, Wim Duisenberg, has hinted at further cuts, expected by some to be as much as one per cent more.

New figures from the first quarter of this year reveal the crisis. The economies have contracted in Germany (- 0.2%), the Netherlands and Italy. The French economy, which is the second biggest in the Eurozone, had a growth of only 0.3 per cent. And the trend down is continuing. Reuter’s purchasing managers’ index fell to 46.8 in Europe (below 50 indicates a shrinking economy). The lowest index was in Germany at 44.7.

The crisis in the European economy is deepened by both the fall of the dollar against the euro and by the Eurozone’s so-called ‘Stability and Growth Pact’. Even after yesterday’s cut, the euro continues to appreciate against the US dollar. Comments from the US Treasury Secretary, John Snow, indicate that the US government is so far complacent about the fall of the dollar.

In the Eurozone, the rise of the euro is already equivalent to an interest rate rise of up to 2 per cent. This means increased competition, falling profits and investments, rising unemployment, undermined public finances – in short, falling demand. This is the reason for the recent warning from the International Monetary Fund of a "considerable risk" of "mild deflation" in Germany. Public sector cuts are cutting demand still further.

This has been recognised even by the ECB. In a ‘Strategy Review’ last month, its previous stubborn inflation target was changed from "below 2 per cent" to "below and close to 2 per cent". This should open the way for further stimulation of the economy. The limited possibilities for a central bank to combat deflation has however been underlined by the development in Japan, where deflation is deepening. In the Eurozone it is even more complicated because it involves not one, but 12 governments.

The stability and growth pact of the EMU prohibits state budget deficits larger than 3 per cent of GDP. Over a ‘conjuncture cycle’, the budget should be balanced. On Monday 2 June, the summit of finance ministers of the EU countries – Ecofin – put new pressure on France to cut its deficit, which is projected to be 3.7 per cent this year. The French Finance Minister, Francis Mer, promised that the deficit would be down to 3 per cent next year. The new deadline is 3 October.

This pledge by the French government will have several important effects: i) It will be used by Prime Minister Raffarin as a key argument for the cuts in pensions and education; ii) It therefore opens the way for continued workers’ struggles; iii) It underlines the reactionary character of the so-called cooperation within the EU; iv) and maybe most importantly, it will further weaken economic growth in France and Europe. In fact, one reason that France is not yet below zero growth is probably because it has not followed all the previous directives of the EMU – the EU’s Economic and Monetary Union.

The tensions and splits within the EU have increased because of both the war debate and the economic crisis. Interestingly, the finance ministers of Denmark and the Netherlands, wanted to put more pressure on France to make cuts immediately.

But still, they have no choice but to stick together in their attacks on workers and on welfare. From the G8 summit, which was a big non-event, the Financial Times reported of a "better mood among European leaders" because Gerhard Schröder won backing by his party for the huge counter-reform programme – ‘Agenda 2010’. And more is to come; the German Finance Minister, Hans Eichel, is still predicting a budget deficit of up to 4 per cent of GDP this year. The common interest is also shown by the idea of Italy’s Prime Minister Berlusconi of a "Maastricht for pensions". The pension bill of Berlusconi has been delayed by over a year and he now wants EU backing to get it through. This is not likely to happen but it shows how the national governments want to use the EU and the EMU for their own counter-reforms.

The crisis of the world economy is only in its beginning; new figures for US unemployment were published on 5 June. For capitalism, the crisis of the Eurozone is both political and economic. The campaign of Rättvisepartiet Socialisterna (CWI Sweden) for the Swedish referendum says ‘No’ to both the euro and to capitalist counter-reforms. Instead, we emphasise the common interests that link the workers’ struggles in Europe, for a socialist Europe of workers to replace the crisis-ridden European Union of the bosses.

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June 2003