UK lucky to fail euro test

A DILIGENT reader asks whether we are converging with the euro-zone economies - a key official test of our suitability for euromembership. He should have asked whether even the existing members are converging as intended. Eurosceptics must be amused to know that the opposite has been happening.

After the euro's launch, things seemed to be going according to plan. Growth rates for France, Germany and Italy in 2000 were just about the same. Then came 2001, with all its problems. France last year appears to have grown more than three times as fast as Germany; and Italy at least twice as fast. Sober forecasts for this year see France growing four times as fast as Germany. The gap between Italian and French growth has risen but at least that leaves the Italians growing about 2 1/2 times faster than Germany.

The same sort of divergence hit other, smaller economies, notably Holland - once growing as fast as Spain but only at one third of that rate last year. What the hidebound euro enthusiasts can't, or won't, see is that the common curanrency is the cause of this divergence. When countries are jogging along at around their long-term natural rate of growth, they tend to converge, in or out of the euro.

When things get tough, the European Central Bank's single interest rate becomes wildly unsuitable for the more fragile economies and not even well suited to the more robust ones. If you don't believe me, ask the Germans and the Dutch.

Meanwhile, we carry on regardless. Britain's growth rate last year turns out to have just missed the expected 2%. But it is still impressive, even surprising, given the worldwide recession and should beat the major euro-zone economies this year. On an honest test, we cannot qualify for the common currency. Aren't we lucky?

US recovery
ONCE they all talked about a V, perhaps a U, surely not an L. Now W is creeping in.

The V represented the views of the optimistic analysts early last year who acknowledged the US economy's decline but foresaw it abruptly bouncing back. Less sanguine forecasters talked of a U - a longer period at the bottom before a bounce. A few suggested L - decline without a recovery in view. The W thesis, gaining support among crystal ball gazers, envisages a sharpish if modest recovery but then another downturn before recovery eventually sets in, as one day it will.

Perhaps that modest bounce will materialise, probably producing a suckers' rally on Wall Street. But it remains hard to see it being sustained. Surveys show some signs of improving confidence among businessmen. But they are doing precious little about translating their words into deeds. Bank lending to business has now been declining for two years. The net percentage of loan officers reporting requests has fallen to minus 70% - firms who would like to borrow more are vastly outweighed by those who would not.

The Federal Reserve also reports that the net percentage of loan officers tightening borrowing conditions has risen to the highest level for a decade. With the Fed trying to swamp the market with easy money, this was not supposed to happen.

As for lending rates themselves, beyond the very short term they remain little changed despite the helter-skelter reductions in the official rate. The constituents for a bounce - V, U or even Wshaped - remain obscure.

Footnote for sceptics: the Philadelphia Fed's survey of eminent economists in December 2000 found them predicting US profits growing 3.5% in 2001. They fell 15%. The S&P would rise to 1490 over the year; it fell to 1150. Growth was out 50%. But they are confident - how did you guess? - of a 'bounce' this year.