EUROPEAN UNION
For the year 2002, the Euro area experienced significantly weaker economic growth than anticipated. Consumer confidence continued to be negatively affected by geopolitical tensions, in particular the conflicts in Afghanistan and Iraq, depressed equity prices and higher oil prices. A lackluster domestic demand was also attributed to poor profitability by firms as well as concerns about unemployment, hurting their ability to shake off the debilitating effects of the global economic slowdown in 2001. Between 1996 and 2002, living standards in the Euro area were lower than those of the United States, and the gap will likely persists for at lest the next five years due to their weaker economic recover.In 2003, overall growth has been relatively moderate so far, although there have been divergent intra-regional trends. Germany, Portugal, Italy and the Netherlands are lagging with 1/2%-1% growth this year, while France, Finland, Austria and Spain are showing a stronger growth level of 1.4%-2%. Given the high unemployment rate that is creeping toward 9% this year and euro strength over the dollar, inflation is actually moderate at roughly 1 1/2 %, causing consumption to strengthen and consumer confidence to be somewhat restored. At the same time, the existing exchange rates between the euro and U.S. dollar are a major cause for concern. Drops in the price levels are causing European firms to lose market share as U.S. good become cheaper, making it very difficult for these European firms to compete. These profit pressures are causing the European companies to cut prices and have especially hurt major German and French firms such as DaimlerChrysler, Volkswagen, Alcatel and Michelin. An upcoming issue has surfaced in the euro area as Germany, which accounts for approximately 28% of European GDP, faces risks of deflation and stagnation.
Demand has been considerably weak in the European Union and monetary policy is proving ineffective. Weak exports are partially blamed for this development. Also, the unemployment rate, which registered 9.2% in March 2003, represents over 4 million lost jobs. Growth is expected to remain below trend in all economies in 2004 with stronger growth in the U.S. than Europe. Fortunately, major American companies, such as Intel, Coca-Cola and Johnson & Johnson, produce up to 30% of their business from Japan and the European Union. This could be integral toward efforts in stimulating their economy. Economists believe that in order to maintain stronger growth throughout the European Union in 2004, they should rely on the higher real incomes due to lower inflation, and aggressive structural reform would be needed in the labor.
Be Sure to Continue to Page 5 of "Recent Developments in the Global Economy: Survey of the United States, Japan and European Union".
