All in all the financial turmoil triggered by the US housing crisis will not leave the European economy completely unscathed but the impact will be largely confined to those countries where the economic and debt picture most resembles that of the US. This means Spain and, to a lesser extent, the UK. For the euro area we now expect growth of 2.1 % in 2008 (previously 2.2 %). Our 2008 forecast for Germany remains unchanged (2.5 %).

A much-worked piece of economic wisdom says: “If the United States sneezes, the rest of the world catches a cold”. This implies that even a slight economic setback in the US has distinctly negative fallout on business elsewhere. Of late correlation between the business cycles in the USA and the euro area has been lower than was the case in the past. What are the causes? Will this trend continue?

At the end of January Alan Greenspan ends 18 years as Fed chairman, the second longest term in office. It was an extremely eventful epoch, marked by a host of crises. The Fed strategy developed by Greenspan as we know it today can be described as a triad of transparency, activist stabilization policy and gradualism in the setting of key rates. However, the fundamental problems, which had led to the 2001 recession, have not been solved. They still exist, payment day has merely been deferred.

The Bush administration has set itself ambitious targets for pension and tax reform in its second term of office. But the money needed to fund these reforms sits oddly with the aim of halving the deficit.

The plans announced by the two contenders for the US presidency, George W. Bush und John F. Kerry, to halve the budget deficit are unrealistic. Implementation of the detailed plans of both candidates would mean a further rise in the deficits.

Over the 1990s the industrial economies enjoyed a period of remarkable peace and macroeconomic stability. In reaction to the end of the Cold War most of these countries significantly reduced their expenditures on national security. For the US almost half of the cyclically-adjusted improvement in the federal budget balance during this period can be traced directly back to reduced expenditure in this category.

In the medium term the USA faces budget deficits amounting to 3 % of gross domestic product. On the basis of realistic assumptions and given the tasks ahead, the Bush administration’s pledge to halve the deficit is unrealistic.