EDITORIAL : THE TODAY'S ZAMAN, TURKEY

                

 

What’s Happening to the US Economy?

CAMBRIDGE –- The American economy has recently slowed dramatically, and the probability of another economic downturn increases with each new round of data.

This is a sharp change from the economic situation at the end of last year – and represents a return to the very weak pace of expansion since the recovery began in the summer of 2009. Economic growth in the United States during the first three quarters of 2010 was not only slow, but was also dominated by inventory accumulation rather than sales to consumers or other forms of final sales. The last quarter of 2010 brought a welcome change, with consumer spending rising at a 4 percent annual rate, enough to increase total real GDP by 3.1 percent from the third quarter to the fourth. The economy seemed to have escaped its dependence on inventory accumulation. This favorable performance led private forecasters and government officials to predict continued strong growth in 2011, with higher production, employment, and incomes leading to further increases in consumer spending and a self-sustaining recovery. A one-year cut of the payroll tax rate by two percentage points was enacted in order to lock in this favorable outlook. Unfortunately, the projected recovery in consumer spending didn’t occur. The rise in food and energy prices outpaced the gain in nominal wages, causing real average weekly earnings to decline in January, while the continued fall in home prices reduced wealth for the majority of households. As a result, real personal consumer expenditures rose at an annual rate of just about 1% in January, down from the previous quarter’s 4% increase. That pattern of rising prices and declining real earnings repeated itself in February and March, with a sharp rise in the consumer price index causing real average weekly earnings to decline at an annual rate of more than 5%. Not surprisingly, survey measures of consumer sentiment fell sharply and consumer spending remained almost flat from month to month. The fall in house prices pushed down sales of both new and existing homes. That, in turn, caused a dramatic decline in the volume of housing starts and housing construction. That decline is likely to continue, because nearly 30% of homes with mortgages are worth less than the value of the mortgage. This creates a strong incentive to default, because mortgages in the US are effectively non-recourse loans: the creditor may take the property if the borrower doesn’t pay, but cannot take other assets or a portion of wage income. As a result, 10% of mortgages are now in default or foreclosure, creating an overhang of properties that will have to be sold at declining prices. Businesses have responded negatively to the weakness of household demand, with indices maintained by the Institute of Supply Management falling for both manufacturing and service firms. Although large firms continue to have very substantial cash on their balance sheets, their cash flow from current operations fell in the first quarter. The most recent measure of orders for nondefense capital goods signaled a decline in business investment. The pattern of weakness accelerated in April and May. The relatively rapid rise in payroll employment that occurred in the first four months of the year came to a halt in May, when only 54,000 new jobs were created, less than one-third of the average for employment growth in the first four months. As a result, the unemployment rate rose to 9.1 percent of the labor force. The bond market and share prices have responded to all of this bad news in a predictable fashion. The interest rate on 10-year government bonds fell to 3 percent, and the stock market declined for six weeks in a row, the longest bearish stretch since 2002, with a cumulative fall in share prices of more than 6 percent. Lower share prices will now have negative effects on consumer spending and business investment. Monetary and fiscal policies cannot be expected to turn this situation around. The US Federal Reserve will maintain its policy of keeping the overnight interest rate at near zero; but, given a fear of asset-price bubbles, it will not reverse its decision to end its policy of buying Treasury bonds – so-called “quantitative easing” – at the end of June. Moreover, fiscal policy will actually be contractionary in the months ahead. The fiscal-stimulus program enacted in 2009 is coming to an end, with stimulus spending declining from $400 billion in 2010 to only $137 billion this year. And negotiations are under way to cut spending more and raise taxes in order to reduce further the fiscal deficits projected for 2011 and later years. So the near-term outlook for the US economy is weak at best. Fundamental policy changes will probably have to wait until after the presidential and congressional elections in November 2012. Europe’s Ukrainian test WASHINGTON, D.C. -- The recent start of the trial in Kiev of former Ukrainian Prime Minister Yulia Tymoshenko, one of the leaders of Ukraine’s Orange Revolution, on charges of abuse of power raises grave concerns about President Viktor Yanukovych’s commitment to democracy and the rule of law.   In reality, it is his regime, not Tymoshenko, that is on trial, along with the European Union’s willingness to stand up for democracy in a large and important neighbor. As the EU and Ukraine launch another round of negotiations for a Deep and Comprehensive Free Trade Agreement (DCFTA), the EU should not repeat its mistakes in accession negotiations with Bulgaria and Romania, which most EU members believe were admitted prematurely, or with Belarus, where it failed to define impermissible behavior in 2008-2010. Instead, the EU should conclude the DCFTA and Association agreement with Ukraine only if the Yanukovych administration demonstrates clear commitment to European values. Anchoring Ukraine inside a DCFTA and political association agreement would undoubtedly bring significant benefits to the country and strengthen its European ties. But these benefits should not come at the expense of turning a blind eye to the democratic norms that the EU claims to espouse. During the 18 months since Yanukovych’s election as president, the United States, the EU, the International Monetary Fund (IMF), the Organization for Economic Cooperation and Development (OECD) and other international organizations have published detailed reports about Ukraine’s lack of progress in implementing economic and political reforms and reducing corruption. The IMF suspended its July 2010 stand-by program after Ukraine failed to implement a second round of reforms. Leading nongovernmental organizations such as Freedom House and Reporters Without Borders have documented the country’s steep slide away from democracy. Last month, the EU unveiled a new and ambitious European Neighborhood Policy (ENP), which stated: “A functioning democracy, respect for human rights, and the rule of law” are fundamental pillars of the EU partnership with its neighbors. To continue negotiations with Ukraine at a time of slowing economic reform and growing official contempt for democratic norms would undermine the EU’s claim to be forging a model for the ENP by upholding “European values” and standards in negotiations for a DCFTA and Association agreement. The clearest example of the Yanukovych government’s undemocratic methods is its repression of its opponents, which the European Parliament sharply criticized in a resolution issued on June 9. During the 18 months of negotiations, the Ukrainian authorities have added new criminal charges to existing ones against Tymoshenko and 12 members of her 2007-2010 government. Many of the charges border on the absurd, while others are attempts to criminalize political decisions. For example, former Interior Minister Yuriy Lutsenko has been charged with having used government funds to pay for a Police Day holiday. Anti-tax protesters are accused of having damaged tiles on Kiev’s Independence Square. To maintain the credibility of its ENP policy, the EU should take three important steps. First, it should draw clear red lines regarding what constitutes impermissible behavior for the Yanukovych administration. The EU should make clear that Ukraine needs to demonstrate a tangible commitment to “European values” and standards. Second, the EU should insist that Ukraine continues to abide by the conditions stipulated in its IMF program. This is important because Ukraine has only partly fulfilled IMF agreements that it signed in 1994, 2008 and 2010. Finally, the EU should insist that Ukrainian authorities halt all politically motivated criminal cases and release those who are incarcerated for political crimes. Selective use of justice has badly damaged the Yanukovych administration’s reputation. Steps in this direction would greatly improve the Ukrainian government’s relations with the EU and the US. These three steps would not resolve all of the difficulties in Ukraine’s relations with the EU. But they would lay down important guidelines and help to insure inclusiveness and transparency in Ukraine’s reforms process. They would also enhance the credibility of the EU’s commitment to promoting democratic reform as a core element of the ENP, and provide a clear roadmap of the steps Ukraine must take before a DCFTA can be concluded. It is not too late to bring Ukraine back to a democratic course. Most Ukrainians yearn for a European future and would turn against any government that precluded such a course. Yanukovych knows this. Does the EU?