Greenspan's Overseas Allies

Europe's ills help ease U.S. prices

In June, the U.S. consumer price index was up just 2.3% on a year-over-year basis, while core consumer inflation (excluding food and energy prices) averaged just 2.7% last year, its lowest reading in 30 years. When you consider that many economists think current consumer inflation is overstated by a percentage point or more, that's an extraordinary achievement for Federal Reserve Chairman Alan Greenspan.

But if Greenspan is regarded as a policy genius, says economist Paul L. Kasriel of Northern Trust Co. in Chicago, "then Antonio Fazio, the head of the Bank of Italy, should be considered some kind of central-banking Einstein." Italy's CPI, which was running about 6% over its year-earlier level as recently as early 1996, was up just 1.4% in June. Indeed, all of the other major industrial nations (G-6) except Britain have inflation rates below that of the U.S., and most have cut inflation far more dramatically than the U.S. in recent years (chart).

To be sure, America's inflation-quelling act is the only one accompanied by low unemployment. But that's precisely why Kasriel thinks it's less "miraculous" than it seems. While conceding the importance of Greenspan's leadership, he points out that a relatively ignored factor has been "the unusual weakness of other industrialized economies at this stage of the U.S. business cycle."

As the jobless rate has dropped in the U.S. during this expansion, notes Kasriel, it has risen sharply in most other industrial countries. He calculates that in the G-6 nations, it climbed by 1.3 percentage points, or 22% on a weighted-average basis (weights based on economic size) from 1992 to 1996. (It has declined in Britain and Canada but is still in double digits in Germany, France, and Italy.) Since the G-6 account for 44% of world output, compared with America's 27%, their continuing anemic growth and high unemployment have tended to hold down global inflation.

For Kasriel, the lesson is clear: The real test of Greenspan's genius--and of the popular thesis that the U.S. economy may have entered a brave new world of inflation-free growth--will come when Europe and Japan adopt policies aimed at achieving robust growth.

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