Central bankers as a species are not exactly renowned for their ability to react quickly to changing circumstances and rarely fall into line with Keynes' dictum about changing minds when the facts change. However, we have seen a pretty remarkable about turn by the king of all central bankers, Mr Alan Greenspan over the past month.
He has moved from a position of worry about domestic inflationary pressures to one of growing concern about the impact of global economic developments on US growth prospects. Having intimated a desire to cut rates on a few occasions in recent weeks, he duly delivered a cut of 0.25 per cent last Tuesday and one suspects that if he had his way the cut could have been greater.
Be that as it may, he has recognised the risks now being posed and is determined to play his part in alleviating the dangers and was not afraid to change his mind.
However, other central bankers are not being quite as adventurous, and in fact the main European central bankers have been quite circumspect about the impact of global development on the European economy.
The president of the Bundesbank, Mr Hans Tietmeyer, has stated quite clearly that he is not overly concerned about damage to the German economy and has ruled out German participation in a concerted Group of Seven Industrialised Nations (G7) easing of interest rates. Mr Wim Duisenberg, the European Central Bank (ECB) president has expressed similar sentiments but he has effectively assured us that euroland interest rates will converge on current French and German levels.
This convergence of rates across euroland which will involve pretty hefty rate cuts in countries like Ireland, Italy and Spain, will be equivalent to a monetary easing of around 0.5 per cent. Mr Duisenberg's view would appear to be that this easing should be enough of a contribution to global monetary conditions. He may not be right.
Economic prospects for Asia, Japan, Latin America and parts of eastern Europe have disimproved quite significantly over the past six months. Growth in Latin America could be as low as 0.8 per cent next year; Japan's growth may not be any stronger, while Asia should experience another sharp contraction. The reality now is that a bloc of countries which accounts for nearly 37 per cent of the world economy is in trouble and facing serious economic and political difficulties.
This is bound to have an impact on the rest of the world economy, a fact that at least Mr Greenspan has recognised. The Italian government has recently revised down its growth forecasts for Italy and ex-Chancellor Kohl admitted in the run up to the German election that the outlook for the German economy is less bright than previously anticipated. Latest data releases in France also point towards a deterioration.
This global economic turmoil is not particularly good news for economic and monetary union (EMU) but we are too far down the road to contemplate a postponement of the project. However, it could have a difficult first year of life.
With growth in euroland starting to slow before it ever really took off, there is now a distinct risk that the modest improvement in the unemployment situation which has been experienced over recent months could be stopped in its tracks and this won't go down well with a European electorate which has not been enthusiastic for the single currency. Last week's dismal unemployment data in France highlight this risk in a stark manner.
Furthermore, a slowdown in growth could seriously undermine the public finances in countries like France, Germany and Italy which barely scraped in under the 3 per cent budget deficit Maastricht criterion last year. If growth deteriorates, some euroland countries could quickly find themselves up against the 3 per cent deficit ceiling outlined in the Growth and Stability Pact. The upshot of all this is that Europe's short-term economic future is looking a little less benign and its central banking elite would be ill advised to persist with the attitude of complacency that has been in evidence in recent times. It is now virtually certain that the ECB will commence operations in January with a REPO level close to Germany's current rate of 3.3 per cent. The general consensus is that rates may be pushed up a little during 1999, but very few are prepared to contemplate the possibility of an actual easing of monetary policy by the ECB.
Such an easing may be necessary to keep the flame of economic growth burning and with inflation now virtually non-existent across euroland, maybe a few brave souls will be prepared to talk about Japanese style interest rates in Europe. Such a possibility looks ludicrous at the moment, but the global economy may now be experiencing the sort of economic shock that could change that perception.
Jim Power is chief economist at Bank Of Ireland Group Treasury. The views expressed here are personal.
