How can one explain that while the US economy is growing at a fast pace of nearly four per cent per annum, producing new jobs at an average rate of 175,000 per month, and while its unemployment rate is stable at 5.4 per cent, the US dollar has reached a record low against most currencies, in particular against the Euro?
Per contra, how does one explain that while the Euro area’s largest economy, Germany, is only expected to grow between 0.8 per cent to 1.8 per cent in 2005, and while its unemployment is still increasing – and this week hit a six year high of 4.48 million, equivalent to 10.8 per cent, the Euro hit a record high of 1.3666 US dollars on 30 December 2004?
Is not the external value of a currency somehow correlated to the strength of economy of the country it represents?
The simple answer is that of course it is. But the correlation is not simple and direct. The correlation has more to do with the prospects for the future rather than just the current state of the economy. So the judgment of the foreign exchange markets in pushing the US dollar to record lows against the Euro is that the US economy will have to slow down to take account of the huge fiscal deficit and the monstrous imbalances in its foreign trade account, or the US currency will have to drop substantially to deflect consumption to domestic produce rather than imports.
On the other hand the markets, while taking full cognisance of the pitiful state of the German economy, notes that things can hardly get worse and that the tough measures taken by Chancellor Gerhard Schroeder, at great sacrifice to his personal popularity, are bound to make the German economy more flexible and better able to generate higher rate of sustainable growth.
The exchange rate relationship between the US dollar and the Euro will in due time re-establish itself more favourably for European exports as the US will have to increase the rate of interest it pays to continue financing its deficits while the Euro area will be given a spur to growth on the basis of low interest rates that are expected to endure throughout 2005.
This is relevant to our domestic economy, not simply because we are committed to join the Euro
single currency, the monetary policy of which is strongly influenced by the state of health of the German economy, but also because we must note the sufferings that a once mighty economy like Germany is going through in order to regain international competitiveness at a time when it no longer has control over the external value of its
currency.
Just as an example, new measures cutting benefits for the long-term unemployed took effect in Germany on 1 January where those without a job, including people
previously registered as social
welfare recipients rather than as jobless, will also face increased pressure to accept job offers or risk losing benefits.
While domestically, government and unions representing public
sector employees negotiate a new collective agreement for the period 2005-2007, they ought to bear in mind the sufferings that co-workers in the private sector, fully exposed to the discipline of globalisation pressures, will have to endure if
the country continues to lose its competitiveness.
One of the reasons why we are in the macro-economic mess we are, is that in past rounds of collective agreements for the public sector, politicians bought themselves electoral favours with our tax money. They were too generous in discharging the role of government as the largest employer in the economy.
Free from competitive pressures that discipline private employers, politicians have served the nation badly in modelling themselves as false heroes while prejudicing public finances and chipping away at our national competitiveness. They played inverse Robin Hood, taxing the poor to be generous with the well to do, especially the high
echelons of the public service.
Nowhere is this more evident than in the gross irresponsibility of the collective agreement signed soon after the 1998 elections as an expensive gesture financed by our tax money to say thank you to the public sector unions for helping the PN to win over the MLP which was holding tight to negotiate something much more prudent in the interest of the national economy.
In the interest of fairness, the government should hold tight in insisting on the wage freeze for public sector employment while applying the money which would have gone into increments to finance retraining programmes for surplus public sector employees to ease their way to productive employment in the private sector.
Ministers should stop paying political games with the nation’s economy and for once understand that the discipline of the EU and the Euro, which the majority in its wisdom embraced, means that the government has to send the right signal to the labour markets by giving priority to the recovery of national competitiveness, without which employees in the private
sector will lose not only their
increments, but their jobs.
For the sake of fairness, the unions sitting at the table negotiating with government must not forget the interests of their other members in the private sector who will bear the brunt of any undue generosity, out of tune with the general macro-economic morass, in the public sector collective agreement.
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