The Hindu Business Line : Eurozone caught in a statistical tizzy

THE major European Union economies are passing through a phase of "statistical uncertainty" but the poor record of the main economies is a "side issue" for investors. The region's stock markets are "certainly not depressed," and at the corporate level there is much "optimism".

This is highlighted by a latest survey (by the prestigious Munich-based IFO) which reports that the German firms are "more upbeat" about future trading and profit prospects.

The German firms are reporting "exceptionally high" export performance and the same trend is evident in France, Italy, Spain and Britain. In 2004, Germany became the world's No: 1 exporter, surpassing the US. This is in spite of the fact that the $11-trillion American economy is five times as big.

Despite such performance on the export and domestic fronts, Europe is handicapped by the current crop of " weak leaders;" they are yet to make a mark on domestic economic and employment issues.

The current German leadership malaise has had a depressing effect on European forums and there is much uncertainty within the EU about the leadership in the UK, France and even in Brussels.

Economic growth in the EU may not exceed the 1.3 per cent mark and over 20 million workers are unemployed or under-employed in the member countries.

Foreign Direct Investments to the European Union countries have also dropped, by a third to $216 billion led by sharp fall in flows to Germany, Luxembourg and Holland. The UK and the US are set to notch up a record surge in FDI. The US is close to the $100-billion mark and the UK the $80-billion mark. China follows with $60 billion and then Hong Kong ($30 billion).

The Eurozone economies have also lost ground in the World Economic Forum's annual ranking of global competitiveness. Analysts attribute various causes led by sluggish economic growth (below 1.2 per cent), large budget deficits and high labour costs.

The gloomy state of public finances has been compounded by the European Commission's inability to "impose checks and balances" as the current account budget deficit in major EU economies exceeds the 3 per cent mark set as an outer limit by the European Commission. Yet, the trade and export figures are healthy and by end of the year the EU economies would have raised their economic and trading profile in the global market place.

The so-called "European Solidarity" is also seen as weakening, as the European Commission is unable to "police" its own basic trade rules. The cracks in European solidarity have become more pronounced as the member-states pursue policies of their own "national self-interest".

Non-European observers are often stuck by the "overt enthusiasm" of individual EU states to enter into bi-lateral relations with emerging markets led by China and India.

Hence, according to Indian observers, there are fresh opportunities for trade and investment.

The Indian companies have so far — with the exception of handful of global trading companies — failed to exploit these opportunities.

On other hand, China's international trading companies are busy establishing beachheads in the European markets, and its exports are gathering fresh momentum.

China's trade surplus in 2004 reached $34 billion and, according to current projections, may soon hit the $100-billion mark.

Hence, there is "edgy nervousness" on both sides of the Atlantic laced by a determination not to "hurt or upset" the Chinese as both Europeans and Americans want to be major beneficiaries of the vast and lucrative trade and investment opportunities in China, which may report record economic growth (of 9.5-10 per cent) by the end of the year.

Despite high growth rates, China and India have yet a long way to go match the European competitive edge as both countries have just about scratched the surface on economic, trading and monetary reforms. They still need to cut red-tape and vastly improve infrastructure.

The World Economic Forum sites China and India as "greatest threat" to fast declining European competitive edge because both countries are accused of "flooding" the global markets with "cheap" goods.

This phenomenon has triggered a pan-European quest to adopt more "protectionist" measures but the more enlightened public opinion on both sides of the Atlantic has pleaded for policies of free trade.

Finland topped the list of "competitive " nations in 2004 and the US came in second but there are major question marks about the economic viability of the US, highlighted by record trade deficit, large budget deficit and low household savings.

But despite low rankings, major European Union economies manage of keep ahead of China and India.

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