Cut interest rates now

Europe, including the UK, needs an immediate reduction in interest rates to help prevent the EU's economy from slithering into a fresh recession. The latest evidence of a UK slowdown - including a slackening of consumer spending and a fresh manufacturing recession - coincides with rising recessionary signs in the eurozone, stalemate in Japan and mixed signals from the United States. Last year's 18% recovery in the value of the euro against the dollar - due to the dollar's weakness rather than a resurgence of economic confidence in Europe - will cut inflationary expectations. This, in turn, will give the European Central Bank a window of opportunity to reduce interest rates by at least 0.5% while others try to sort out the mess arising from the eurozone's masochistic fiscal policy. If the ECB does not reduce interest rates then Germany - the second biggest economy in the world which is already buckling under the strain of an overvalued currency - will find the going even tougher and won't be able to trade its way out of a budget deficit that is already breaching the 3% Maastricht ceiling.

The question facing Europe is whether it wants to continue to rely on US growth or whether it starts to act as the economic giant its founders hoped it would become. The US economy, it has to be admitted, has confounded its critics for several years by delivering respectable growth despite an overhang of consumer debt, corporate debt, a national budget deficit and an embarrassingly large trade deficit that could so easily have sent the economy into reverse thrust. The US economy's ability to expand by 3% in the first three quarters of the year in the face of corporate scandals like Enron, a collapsing stock market, expectations of war and the telecommunications debacle has been dubbed "the most under-reported story of the past year" by the Wall Street Journal. The WSJ has a point, even though the underlying weaknesses of the US economy, including a still overvalued stock market and a vulnerable currency, could induce a destabilising correction at any moment. This week the Bush administration is expected to announce tax cuts aimed disproportionately at the rich to restore "incentives" as if nothing has been learned from the excessive incentives of the Enron era. If, and it is a big if, there is scope for tax cuts (rather than increased public spending) then they should be aimed at poorer people who deserve them more and who are more likely to go out and spend, rather than save, the extra income thereby helping to revive faltering consumer sales.

Interestingly, you have to look east these days, at the countries to which so much western manufacturing is outsourced, to find the fast growing economies. They include China (8.1%), Thailand (6%), Malaysia (5.6%) and India (5.8%). The fastest growing economy in the broad European area is Turkey (7.9%). The bright spot of the Turkish economy last year was a 12% growth in industrial output and the weakest was an inflation rate so high (32%) that it would distort the European average if it were included in Europe's official statistics.

It is time now for Europe to exploit its hidden strength. The eurozone still sports a trade surplus of $94bn. Well over 90% of its trade is with other European countries and there are huge mutual benefits to be gained from the industrialisation of the applicant countries in the east. It is time Europe started thinking of itself as the economic giant it could so easily be and stopped living off the crumbs of US economic expansion.