The economic news coming out of Europe continues to be grim. Europe’s GDP contracted 1.5% in the fourth quarter (vs. the previous quarter), the largest quarterly drop since the euro-zone began keeping such records, in 1995. Even more worrisome, the largest economy in the euro-zone, namely Germany, posted a 2.1% GDP contraction in the fourth quarter, the largest GDP quarterly decline in over 20 years. The next largest euro economies, France and Italy, followed suit, declining 1.2% and 1.8%, respectively in the fourth quarter. Overall, the euro-zone faces its worst recession since the 1950s.
The G7 meeting in Rome convened on Saturday after a social dinner Friday night. However, this social dinner became controversial when it was delayed by thousands of Italian workers who were protesting against rising unemployment in Italy. The next morning, when business meetings started, the major theme of the G7 meeting emerged: An emergency drive to avoid destructive trade protectionism, since exports have plummeted for virtually all G7 members. One reason that protectionism became a major theme is that there were some “Buy American” provisions in the early drafts of the U.S. stimulus/spending bill then being hammered out in secret on Capitol Hill.
The weakness of the British pound and the strength of the Japanese yen were also debated at the G7 meeting. Japan’s strong yen has had a devastating impact on its export-oriented economy, while the plunging pound does not seem to be able to boost the British economy. There was a general belief that any dollar rally will likely be temporary, due to the swelling U.S. budget deficit, which could approach $3 trillion in fiscal 2009. The U.S. dollar can’t remain strong for long and in fact, the U.S. dollar softened when the massive stimulus bill passed Congress.
At the end of the G7 meeting, the finance ministers and central bankers said, “We reaffirm our commitment to act together using the full range of policy tools to support growth and employment and strengthen the financial sector.” Ho-hum: Nothing new there. Due to the lack of any further detail in this generic G7 statement, most economists are now hoping for some more specific solutions at the upcoming G20 meeting, starting on April 2 in London.