Current Upswing Supports Labor Market Policies in the EU

In 1998 and 1999, Europe is likely to post the highest economic growth in the triad. The current upturn tends to ease the pressure on the labor market and on public households. The main risks threatening the cyclical upswing emanate less from the development in South-East Asia than from the unstable situation in Russia. The asynchronous development of the business cycle within the triad and the financial and economic crisis in South-East Asia have changed the pattern of growth in the global economy. The Asian region, formerly the main growth center of the world economy, is engulfed in a serious crisis. With domestic demand declining, South-East Asia is recording an economic slump in 1998. Japan, through its close financial and trade ties to the economies most affected, is the country most directly exposed to the Asian crisis. It is currently in a state of deflation. The U.S. economy has experienced a very favorable development since the middle of 1991. The weakening of exports, mainly a result of the rise in the value of the dollar, should lead to a slowdown, despite the continued strength of consumer and investment demand. The European economies are set to become the engines of growth for the world economy. Conditions exist for a long and vigorous upswing. The smooth transition to the EMU has contributed to stabilizing the expectations of investors and consumers. Nominal interest rates have declined markedly and relieved the interest burden for enterprises and public households. Fiscal policy should have a less restrictive effect than in the last few years. The weakness of commodity prices also tends to ease cost pressures. Growth in the EU could accelerate to 2¾ percent in 1998 and 3 percent in 1999. The cyclical upswing leads to a decrease in the unemployment rate to 10 percent, that will be supported by efforts of intensified active labor market policies in Europe ("National Action Plans"). The more advanced reform countries of East-Central Europe are likely to continue the catching-up process, but Russia and the other countries of CIS remain in a critical situation – that could pose a considerable risk for Europe.