World Economic News
Germany Slips Into 'Quiet Depression'
"Germany's Quiet Depression" reads the headline of an editorial in the German economic daily Handelsblatt April 30 by Lothar Spaeth, until recently chief executive officer at Jenoptik, Thuringia, and formerly Governor of Baden-Wuerttemberg. In Germany, he says, everybody now is "consolidating," and waiting for better times: Private households are cutting down on consumption; corporations are cutting investments; banks are becoming more reluctant to grant credits. People in Germany have fallen into a "fatalistic" mood, where they accept economic downturns as some kind of "natural law."
This is all complete nonsense, says Spaeth. The end of economic growth only comes, when you stop pursuing successful economic policies. The fatalistic belief in the economic downturn is nothing but a typical "self-fulfilling prophecy." Spaeth adds: "Quietly and without reflection, we step by step have slid into a depression, that cannot simply be blamed on world economic data."
The most important element to boost economic growth in Germany is an intensification of technological innovations. What turned Germany into a leading economy after the war was "the commitment to discover and to take risks, combined with a strong will." It's fine that Volkswagen was bailed out last year by a very strong demand from China. But in a few years, the Chinese will produce similar cars by themselves. We have to rapidly increase innovations and generate new products, says Spaeth. Germany once again has to focus on the export of those products, which are needed everywhere but which no other country is able to produce.
Europe Telecom Equipment Sector Continues Meltdown
The meltdown in Europe's mobile-phone infrastructure business continues. As Ericsson AB, the world's largest producer of wireless networks reported on April 29, sales fell again by 30% in the first quarter 2003 and new orders are down 35%. Alcatel, the second-largest producer of telecom equipment in the world, on the same day reported a 31% drop in sales for the first quarter. In view of this outlook, Ericsson will slash its workforce by another 13,000 jobs, stated the new chief executive officer Svanberg at a press conference in Stockholm. The Swedish telecom flagship had already reduced its workforce from 105,000 to 60,000 since the end of 2000; the latest reduction will reduce it to 47,000. Ericsson just announced its eighth consecutive quarterly loss. The stock price of the 127-year-old company, one of Sweden's most widely held, has lost 96% since the March 2000 peak, wiping out $280 billion in market value. This is roughly the present market value of all 30 companies listed in Sweden's OMX stock market index.
Ericsson, Alcatel, Nortel, and other mobile-phone infrastructure producers in the world have eliminated more than 200,000 jobs since the year 2000.
Banks and Insurers in Crisis, Worldwide
The latest string of disasters among financial institutions in the G-7 club include the following events, all from April 28:
* Mizuho Financial Group, the world's largest bank by assets, announced that it will post a loss of 2.38 trillion yen ($19.8 billion) for the fiscal year which ended March 31. It would be the biggest annual loss ever by any Japanese corporation. Final figures will be presented on May 26. On April 28, the Japanese Nikkei index plunged to another 20-year low, with Mizuho stocks crashing to an all-time low. Just in the recent six weeks, Mizuho stocks fell by another 50%. The annual loss of Mizuho will probably be about four times higher than the entire market value of the bank, which has imploded to $5.2 billion.
* Munich Re, the largest reinsurer in the world, fired its chief executive officer, Hans-Juergen Schinzler, following fourth-quarter 2002 losses 2.2 billion euros. In the first quarter of 2003, Munich Re generated more losses, in particular due to the crashing prices of its large shareholdings, such as its stakes in Allianz and in HypoVereinsbank and Commerzbank, the two German banks which suffered the biggest stock market losses in the recent 12 months.
* Ten of Wall Street's largest investment banks signed a settlement with U.S. securities regulators, forcing them to pay $1.4 billion in restitution. The banks were accused of deliberately luring investors into the late 1990s stock market bubble. In order to attract new corporate clients for their investment banking business, the banks promised the corporations cheerful reports by its "stock research" departments. In the center of the fraud allegations are Salomon Smith Barney (belonging to Citigroup), Credit Suisse First Boston", and Merrill Lynch. Several star analysts of the bubble times, including Internet revolution guru Henry Blodget, received life-time bans from doing stock research. Legal cases concerning the same allegations have been filed by groups of investors and could lead to much higher penalties than the $1.4 billion.
Bank of Japan Pumps Another $14 Billion Into Banking System
Following the new 20-year low of Japanese stock prices announced April 30, government reports underlined the worsening state of the Japanese economy: Industrial production in March, widely expected to have increased, indeed fell again by 0.2% compared to February; construction orders fell in March for the fifth consecutive month, down 9.3% compared to a year ago. Official unemployment in Japan is close to an all-time high, wages are down to the lowest level in 11 years, prices have fallen for 43 consecutive months, and bank lending has fallen for 63 months in a row.
In order to prevent a "possible crisis," new Bank of Japan (BoJ) governor Toshihiko Fukui said, at a press conference, the BoJ made a surprise move April 30, raising the target for current-account deposits that banks keep at the central bank, from 17-22 trillion yen to 22-27 trillion yen. In practice, this means that the BoJ will provide an additional 5 trillion yen ($41 billion) in cash to the banking system. Fukui said, "We cannot deny that there are some signs that exports, production, and consumer spending could weaken." The BoJ statement explaining the move notes: "The stock market continues to be unstable, particularly banking shares, and we must be alert to risks of this having a negative impact on financial markets and the real economy."
Children Continue To Die of Malnutrition in Argentina
As the Argentine government blathered about positive economic growth and a "recovery" underway, severely malnourished children in the northern province of Tucuman are dying, according to Dr. Lorenzo Marcos, head of the Children's Hospital in the provincial capital of Tucuman. The "Operation Rescue" announced with much fanfare by first lady Hilda "Chiche" Duhalde last fall, when news of malnutrition in Tucuman first became known, "has rescued no one from hunger," says Dr. Marcos. In fact, the situation has worsened. There has been a 30% increase in the number of children suffering from second-degree malnutrition, while the number of children suffering from the most severe form of malnutrition, has remained unchanged, according to a report in Prensa Sindical Internacional April 23.
Dr. Marcos stated that no one has addressed the fundamental cause of malnutrition: the social and economic issues. You can hand out bags of food for a week, a month, even a year, but in the end, such efforts are worthless. Handouts, in themselves, "resolve nothing," he said. In fact, they denigrate people, who would rather have a productive job and earn a salary, even if it is a small one. Graciela Salazar, a social worker with the Catholic charity CARITAS, warned that "poverty and hunger are threatening Tucuman's future. There is no hope for life ... our province's human capital is destroyed. Poverty conditions the person, and hunger destroys him." Tucuman is just a microcosm of all Argentine provinces, afflicted by malnutrition among all age groups, but where children are particularly vulnerable.
Snow Orders Ibero-America To Bow Down Before the Markets
Reporting to the Council of Americas annual conference April 28 on his April 21-25 visit to Brazil, Ecuador, and Colombia, U.S. Treasury Secretary John Snow assured the Wall Street crowd that the three governments understand that "financial markets have to be dealt with.... There's no escaping them; they're relentless. They render a judgment on us. You may come to office thinking you can go off and pursue a set of policies to quickly build your popularity. But if that set of policies isn't consistent with sound underlying economic policies, your country risk premium will go up. Your debt will be put under enormous pressure, and you're very likely to have a default and a most unhappy set of political consequences to deal with."
With a perfunctory show of concern for the "social agenda" which each of those Presidents argue they must implement, Snow assured the Council of Americas that the fear of the markets "is really reflected in the hearts and the souls of those three leaders," and they understand the markets must come first.
Snow delivered brutal threats all along the way: In an April 23 press conference in Brazil, Snow reported that his message to Brazil's President Lula da Silva and officials, was that they have a long road in front of them, before the "markets" will be convinced that they are really committed to austerity. He specified that pensions, the tax code, and labor legislation must be "reformed," and laws guaranteeing central bank independence passed. Brazil cannot produce a primary budget surplus for only one or two quarters, nor for only one or two years; many years of surplus are required, before the markets will be convinced, he said.
As a "carrot," Snow made a big deal over how Trade Representative Robert Zoellick, scheduled to visit Brazil at the end of May, had instructed him to pass on the message, that the U.S. is willing to put "everything on the table" in the negotiations for the Free Trade Accord of the Americas (FTAA).
Brazilian Foreign Minister Celso Amorim, at least, was not impressed. Amorim told the Foreign Relations Committee of the Chamber of Deputies on April 23, that "to say everything is on the table, and to say nothing, are almost the same thing.... We cannot fall for this siren song that everything is on the table." Brazil intends to open up several topics which had been considered settled in the FTAA talks, for further negotiations, he also announced.
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