It might seem obvious that U.S. recovery should be good for world economic health. In general, of course, it is. But one’s hopes for the strength and timing of the recovery also hinge, quite reasonably, on where one lives. After shrinking a little last year, the U.S. economy could grow as much as 4 percent this year, according to the most recent and optimistic forecasts. That 5 percent upward swing would raise global GNP by 1 percent, a $500 billion boost that could make the difference between good times and bad. In much of Asia, where a strong America is not only a crucial export outlet but a welcome counterweight to both a sinking Japan and a rising China, this would be a clear windfall. In Europe, however, it could be less opportune. “From a European perspective, we don’t want the U.S. in recession but we don’t want it scorching away the way it has for the past five years,” says Robert Lind, chief European economist at ABN Amro bank in London. “The big problem is if we see growth in the U.S. of 4 percent or more.”
So how does a boom become a problem? U.S. growth at that pace would tend to strengthen the dollar and weaken the euro. That would pressure Europe’s Central Bank to raise interest rates (hoping to lure investors back to euro-based securities), which in turn would choke off European business and consumer spending. If it recovers too fast, American growth could have the perverse effect of slowing European growth. This is far from certain. But many eco- nomists now believe the recession will be V-shaped, implying a rebound as sharp and potentially unsettling as the fall.
America’s high-octane boom of the late ’90s has made everyone newly wary of excessive growth, because it set the stage for the 15-month stock-market crash that began in March 2000. It took a year for the U.S. eco- nomy to begin contracting. Businesses suddenly stopped investing in Internet gizmology, and the lingering effects of the oil-price shock spread the pain. Europe was soon brought up short by similar shocks. Europe also suffered from rising food prices, due in part to the mad-cow scare, and tight money policies from the new European Central Bank compounded the squeeze. The crash of the dot-coms was magnified in Europe by government auctions peddling access to “third generation” Internet pathways, which ended up saddling the winning corporate bidders with multibillion-euro debts. Many Europeans still point to these crippling symptoms as evidence of how different their recession is from the American strain. Says Keith Church of Oxford Economic Forecasting, “Our slowdown doesn’t have much to do with their slowdown.”
Not much–except that the tougher times spread from America. True, Europe does trade increasingly within its own borders. But a recent analysis by HSBC shows that in the year ending last September, a dramatic slowdown in U.S. import growth probably knocked about six tenths of a percent off the GDP of the 12 nations of the euro zone. Since September 11, shrinkage in the airline industry alone was enough to cut another two tenths percent off euro-zone growth.
Though no less wary of American dominance, Asia has not indulged the same illusions of independence. In Europe, a strong euro is seen as proof positive of a unifying Europe. In Asia, the forces of disintegration are at the fore. Still struggling to overcome the contagion of 1997, many nations fear both looming crisis in Japan and the growing export might of China. Japan recently dropped its defense of the “strong yen,” hoping that a weaker currency will help it export its way out of recession. A strong dollar is not only welcome in Japan, it’s official policy. With prices falling, unemployment rising and corporate debts mounting, this is no time for jealous pride in the yen. “We could see a collapse in Japan’s exports, followed by capital flight and a bond crisis,” says a well-respected Tokyo analyst, who insists on anonymity. “Japan could be the next Mexico or Argentina.”
The threat of a new contagion makes an American recovery even more urgent for Japan’s neighbors. South Korea, Taiwan and Singapore were devastated by the U.S. recession, as falling exports led to some of the toughest times since World War II. There are signs of recovery now, as export decline slows, and prices for Taiwanese chips, Korean semiconductors and other key exports rise. A stronger dollar will help accelerate this trend, and at least partially offset the threat of cheaper exports from Japan. “Japan’s export share has dropped, so it is trying to depreciate its currency vis-a-vis China and Korea. We are very concerned,” says Wang Yunjong of the Korea Institute for International Economic Policy in Seoul. “Japan has suffered a major decline in domestic demand, which is also a problem for the regional growth rate in Asia.”
The hope for global recovery now rests in good part on the amazingly optimistic American consumer. Ian Harwood, head of economics and strategy at Dresdner Kleinwort Wasserstein in London, doubts the United States can rebound strongly, citing a problem Americans are loath to recognize. The investment bubble was accompanied by a “consumption bubble,” built on debt that will have to be paid down before the United States can manage more than “muted” growth. The only other developed nation to undergo such a binge was Britain. The Japanese are too recession-scarred to borrow, much less spend. Germans are sitting on their money due to fears over job cuts and the pension time bomb.
The coming of the euro is likely to push Germany to loosen up, and force all of Europe to become more “American” in its business ways. Replacing many currencies with one creates a unified market in which money, and with it goods and people, flow more easily across borders. It’s already happening, most dramatically in surging new markets for stocks and bonds denominated in euros (which were issued for electronic financial transactions in 1999). These markets allow companies to raise money across Europe, and free investors to choose from the best companies in Europe, not just in their home country. Competition will grow even more fierce following the introduction last week of euro notes and coins. Customers can easily compare prices across borders. Companies will have to compete on price, to cut costs, and even take on the labor unions that are the heart of what’s left of European socialism. “Europe will continue to move closer to the Anglo-Saxon model,” says Morgan Stanley economist Joachim Fels. “And the euro is the instrument for that.”
This may not be the independent path many Europeans like to imagine. But it has its upside. Fels predicts that reforms will ensure that euro-zone growth will accelerate over the next three to five years. The IMF foresees stronger growth in Europe than in the United States next year. In fact it’s not inconceivable that one day we’ll look back and see that Europe has recovered more robustly than America.
