The illusion of Bush´s Stimulus Plan

Location: New York
Author: Lenny Broytman
Date: Wednesday, January 23, 2008

While the frightened mess of an economy in the US was busy issuing an emergency rate cut to deal with the growing fear of recession, the European Central Bank was cooling its heels, choosing to sit idly by, instead of jumping on the American bandwagon.

Nevertheless, the continent is undoubtedly feeling the effects of the US slowdown and many analysts are saying that if European stocks continue to plummet, the ECB will have plenty to worry about.

“Conditions have changed dramatically of late and even from an ECB perspective, this is not the time to worry about inflation,” Audrey Childe-Freeman at CIBC World Markets wrote in a note.

According to the New York Times, some European analysts are looking back to the burst of the dot-com bubble as an indication of how things will now play out. If you recall, the tech collapse gave way to a number of rate cuts by the Federal Reserve, the first of which came in January 2001. Although the Europeans insisted that the effects of the collapse would be limited, many people were biting their tongues by as early as May of that year.

According to Ken Wattret, an economist at BNP Paribas in London, the pattern is doomed to repeat. Although the European bankers will first await further data to confirm what they already know is true, they will be cutting rates, just as the US has.

The European Central Bank, just as the Federal Reserve in the US did, take the time in December to inject billions into their economy in an effort to alleviate what they knew was beginning to happen. The plan was ultimately to secure liquidity in the international financial system.

With all that said, the New York Times insists that Europe is rather confident that the damage to its economy will be minimal.

At this moment, officials in Europe will keep their eyes on inflation, which has reportedly jumped to 3.1 percent over the course of the last two months. According to Jean-Claude Trichet, the head of the central bank, the bank is more than prepared to act "pre-emptively" if inflation becomes responsible for escalating wages.

Meanwhile, the US economy is facing its own troubles, with President Bush pushing for a miraculous stimulus plan that he hopes will get the US economy back on track.