22 November 1997 • Monetary Union Promotes Growth in the EU. Medium-term Forecast for the World Economy until 2001 • Stephan Schulmeister

Since the beginning of the 1990s, the USA has – for the first time since the end of World War II – held the "leadership" in the growth dynamic of the "Triad": between 1991 and 1996, the USA's GDP grew at a yearly rate of 2.9 percent – almost twice as quickly as Europe's (+1.6 percent). Economic growth over this period was weakest in the country which had shown the greatest economic vitality over the long term: total output in Japan grew at a rate of only 1.2 percent p.a. between 1991 and 1996.

To a large degree, these developments can be attributed to the differing economic policies pursued within the "Triad". The USA has gradually changed the course of its economic policy since the mid-1980s in reaction to the negative consequences incurred through a high interest rate policy, the rise in the dollar's rate of exchange, as well as growing budget and current account deficits ("Reaganomics"). The low interest rates for the dollar, the currency's strongly under-valued rate of exchange, a process of budgetary consolidation that is primarily revenue-based and implemented by raising marginal tax rates, the strengthening of the purchasing power of the "working poor" through the extension of the "negative income tax", and the acceptance of an interest rate around 3 percent together made possible an economic growth rate that was so high (1991-1996: +3 percent p.a.) that the levels of both unemployment and the budget deficit decreased significantly.

In contrast, between 1991 and 1996 western Europe's medium-term economic growth was constricted to an annual rate of 11/2 percent as a result of the high interest rate policy pursued by the German Bundesbank between 1990 and 1992, the subsequent collapse in 1992-93 of the system of fixed rates of exchange (a collapse which the Bundesbank's policy helped to bring about), the appreciation of the DM and its "satellite currencies", as well as the parallel implementation of austerity policies, which in many countries led to a strong reduction in the purchasing power of the weaker elements of society. Despite the absence of global turbulences like the oil price shocks or the debt crisis of developing countries, western Europe has seen its levels of unemployment and national debt rise at a faster rate since 1991 than during any other five-year period since the end of World War II.

The sharpest drop in economic growth since the start of the 1990s has taken place in Japan, not least because the yen has appreciated more than any other currency.

The realization of the "large" Monetary Union (incorporating all eleven of the countries which seek to participate, with the exception of Greece) as of the beginning of 1999 will have an enduring positive impact on the framework for trade, investment and production within the EU: a decline in the transaction costs for trade and travel between countries participating in the Monetary Union (the elimination not only of the fees incurred in exchanging currencies, but also of the costs of hedging the exchange risk), sustained low nominal interest rates, fixed exchange rates between the Euro and the other European currencies (in particular, the British pound), and a somewhat less-pronounced overvaluation of the ECU or Euro vis-à-vis the dollar will together make possible an annual economic growth rate of 21/2 percent in western Europe between 1996 and 2001.

Until 2001, the medium-term rate of economic growth in Japan and the USA is also likely to be around 21/2 percent p.a. – a marked increase for the Japanese economy, but a weakening for that of the USA.

The rate of economic growth in the formerly planned economies will rise to 41/2 percent per year for the period between 1996 and 2001. The differences between the economic trends in the transition countries of East Central Europe and those of the CIS will be much less pronounced than they have been over the past years. Economic growth will also rise in the oil exporting developing countries, namely to +31/2 percent p.a. While the growth rate in the remaining developing countries is likely to decrease slightly, this group of countries will nevertheless continue to easily outdistance the other economic regions by realizing an annual growth rate of 61/2 percent.