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Perhaps he's not so Dim Duisenberg after all

SHED a tear for poor old Wim Duisenberg. The Americans think he is out to lunch for daring to suggest that when the US catches flu, Europe will not sneeze much. The Guardianistas want him to safeguard the steady fall in Europe's unemployment. Then - unkindest cut of all - the Belgian Finance Minister tried to get him sacked - fortunately Mr Trichet is not available until his alibis have been confirmed in the Credit Lyonnais affair.

In short, everyone wants Wim to cut interest rates, or else. But dim fellow that he is, he thinks the Maastricht Treaty makes him and his European Central Bank independent. Does he not understand Brussels nods and winks?

Then, the charge-sheet goes on, he presided over the collapse of the euro in a disastrous first two years, not to mention his mishandling of current events.

So let us consider that charge-sheet. Of course, the euro's 25pc-odd collapse in the past two years has been a terrible disappointment to all those who forecast a strong euro that would "challenge the dollar". But then we are all aware of how risky the whole project was - none more so than the ECB's board, aware of the absence of the "flexibility" and "reform" it has insistently and rightly demanded to allow the euro-area's many regions to absorb their differing shocks.

In 1999 Germany and Italy were struggling to recover from the Asian Crisis - the large Asian over-capacity in manufactured goods was undermining their large manufacturing sectors.

Other countries - France, Spain and the smaller "peripheral" ones - were recovering nicely. But the ECB could hardly risk letting its biggest and most important client, Germany, go hang and, horror of horrors, contemplate leaving the unpopular euro.

It cut interest rates to 3pc and let the exchange rate fall. The result has been miraculously beneficial, a bit like our departure from the exchange rate mechanism in 1992. Germany and Italy have both returned to better health, with falling unemployment.

Wage inflation did not take off - euro-zone average wages are growing at only 2.4pc a year. Yes, inflation exceeded the ECB ceiling of 2pc - it is now 2.6pc. But much of that is energy-related and likely to pass out of the figures in a matter of months, given the quiescence of wages. In effect the ECB took a bit of a gamble on loose money and a falling exchange rate - and won. Not-so-dim Wim.

Now turn to the present. The charge is that interest rates at 4.75pc are too high, for two reasons. First, inflation will fall below 2pc as just argued - so on the usual inflation-forecast basis a cut in rates is right. Second, a hurricane is blowing across the Atlantic and a pre-emptive cut will help to dull the blow as it hits the coast of Europe in the next few months.

Start with inflation. The ECB says it is unhappy with it at 2.6pc; yes, it should fall but will it do so if the ECB rolls over and cuts rates? There is still over-heating in many parts of the eurozone, France and Spain notably; and unemployment is close to the rate at which unions traditionally raise their wage demands.

In France, wages are rising at 5pc; and those French unions, who knows what they might do? The "euro in people's pockets", in Harold Wilson's phrase, may not have fallen too much, but the external value of the euro is pauperising if you holiday in Anglo-Saxon countries - could this produce a delayed union backlash against devaluation?

In sum, a cautious ECB wants to make jolly sure inflation comes well back under control before it lets up - nothing so wrong with that, surely?

So what about that US hurricane? Well, when our Wim gets out his binoculars, what does he see? He sees the legendary Mr Greenspan, his oppo in Washington, frantically cutting rates to fix the problem.

Greenspan is confident that wages, rising at 4.3pc against productivity growth somewhere between 3pc and 5pc, are non-inflationary, so he has complete freedom to cut rates as much and as fast as he needs to head off recession.

With Europe still growing strongly, Asian growth steady in the 4pc-6pc range, Japan sick but not much more so than usual, and Argentina under the watchful eye of the IMF and the State Department, he faces no foreign complications.

The truth is that the slowdown was deliberately brought on by raising interest rates in the summer, and that it was overdone and now will be corrected with whatever cuts it takes.

There are high-faluting stories around that this recession "is different", that it is an over-capacity recession like those good old 19th-century ones - over-investment binge leading to bust.

But the business cycle invariably has this element in it, the "accelerator" effect of investment: in the upswing there is a spurt of investment as more plant is needed, but once it is built, investment falls off again. As it falls, growth slows, the excess capacity triggers job cuts and worried households cut consumption. Same story every century. Today, the excess capacity happens to be in computers; this is a help to a speedy upswing as the rate of depreciation is so fast that the replacement cycle will be on us in no time. Productivity growth may slow but only briefly as the machines are in place and people are using them to improve their ways of doing things with better software or just plain learning by doing. Nasdaq companies must also learn not to give the stuff away to clever old-economy users.

What Greenspan is doing is cutting interest rates to induce consumers to bring forward some of their spending plans and fill a bit of the hole left by receding investment. This "intertemporal substitution" should be a powerful effect provided that the consumer does not take general fright.

The US consumer today is enjoying 4pc-plus wage growth, full employment (with severe scarcity in most places still), a dynamic economy and a stock market hugely up over the last decade; no reason there to get frightened.

Our Wim sees all this and thinks: 'why should I panic when Alan is doing all my panicking for me?' Quite smart after all.

Patrick Minford is professor of economics at Cardiff Business School  

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