Ground Floor: Buy the rumour, sell the fact is an old axiom of trading. When everyone is speculating about the possibility of something happening, your best bet is to go along with the crowd. When it's actually happened, you don't hang around but move on to the next big thing, writes Sheila O'Flanagan.
Last week I mentioned that the French economy had defied predictions and performed better than expected in the second quarter. It isn't only the French, of course; the entire euro zone has moved from a plodding marathon-runner into - if not a sprinter - certainly something of a middle-distance athlete. It's growing at its fastest level since 2000 and, at an annualised 3.6 per cent, that's means we've overtaken the US for the first time since 2001. The trainers - Breton in France and Glos in Germany - have been making positive comments, but the armchair pundits are wildly sceptical. They reckon the euro zone has peaked and the next big thing is sadly downhill.
Part of the problem is, actually, passing out the US. The US is the pacemaker around the global economics track and the euro zone simply isn't used to being in front.
Sure, there are the pumped up Asians to catch, but the battle of the hearts and minds is still between Europeans and Americans. The US is, after all, where Europe sends about a fifth of all exports. But that means a slower US economy will drag Europe down with it, which is why most economists are expecting a reversal of fortune in 2007.
One of these is Norbert Walter, the much quoted chief economist at Deutsche Bank and someone whose views are taken reasonably seriously by markets. He feels that a global downturn in 2007 will start in the US due to the Fed's interest-rate hiking policy and high energy prices. This will have a knock-on effect on much of Asia (excluding China) and will then be felt in Europe.
Walter isn't keen on the European Central Bank's (ECB) enthusiasm for tightening rates because his view - and it's hard to disagree with him - is that the euro zone has barely started its race and it should gather a bit more steam before being jerked backwards.
The German situation is particularly problematic. Having, as chancellor Angela Merkel says, turned the corner economically, the government has plans to push up VAT to 19 per cent in January in order to reduce a budget deficit, which has been running at more than 3 per cent of gross domestic product.
Pushing up taxes to plug deficits is a very old style European tactic but one which has been seen as a bit outdated of late. However, Merkel thinks the happier state of the German economy - much of which is due to the construction boom prior to the World Cup - will make this acceptable to voters.
It will more than likely have the effect of sending consumers rushing into the shops before the end of 2006, giving a huge final-quarter spurt, but staying at home in 2007 and making all the predictions come true.
It's a tragedy to see the German government revert to old training methods! Particularly by increasing a regressive form of taxation. Tax revenues increased this year ahead of expectations thanks to the economic revival.
A measure aimed at taking money out of people's pockets just as they seem to have found confidence in spending seems extraordinary. It is, of course, possible that the Germans have actually got it right and their new-found confidence will not wane even in the face of higher prices, but it's a difficult balance to get right.
Some economists are wondering whether the notoriously conservative Germans have a new-found confidence at all. They're suggesting that Germans are spending money in 2006 precisely because of the proposed tax hikes next year and they fear the wallets will close with a snap in January.
The question is whether the rest of the euro zone can stay on an upward trajectory if the big hitters begin to fall back.
The improved growth of the second quarter isn't just restricted to France and Germany - Italy, Spain and the Netherlands have all posted better than expected numbers. But this is part of the problem. Economies are getting into their stride but so is inflation - at 2.5 per cent it's above the ECB's target level of 2 per cent.
Everyone's target level for inflation is about 2 per cent. But the numbers are certainly being pressured by higher energy prices, which feed through to consumer prices and wages.
The problem for the technical guys at the ECB is that inflation is their main focus. But should they give a bit of inflationary slack in order to let euro-zone economies make a further dash for growth?
Obviously, high inflation is not a good long-term prospect. But there does seem to be a case for juggling between inflation and growth so that the euro zone can build up a head of steam of its own. It's not a good confidence-builder to find yourself close to getting out of the pack, only to discover that someone from your camp has moved the finishing line.
At the beginning of the year, the armchair pundits were all calling for reasonable growth in the first half of the year with a slowdown in the second half.
Europe has over-achieved in maintaining that growth so far. However, despite our move in front of the US, we don't yet have the pedigree to maintain it. Over the last five years, the euro-zone average growth increase has been about 1.4 per cent compared with 2.6 per cent in the US. So Jean-Claude Trichet, ECB president and coach of Team Europe, still has a lot of game-planning to do.
www.sheilaoflanagan.net
