All of that is especially disturbing since the U.S. remains by default the world economy's prime driver. "There's been a lot of talk at this meeting about America as the world's military superpower," says Laura D'Andrea Tyson, dean of the London Business School and a former top economic official in the Clinton White House. "But there hasn't been enough talk about the world's excessive dependence on the U.S. as an economic superpower. The U.S. doesn't want this responsibility, and it's not healthy for the world." Instead of scolding U.S. consumers for supposed profligacy, Tyson thinks Japan and Europe should be working harder to fulfill their economic potential so they can comfortably increase consumer demand.
In both places, that's easier said than done. Pascal Blanqué, chief economist for Crédit Agricole, sees little chance of new demand coming from Europe, where he thinks the economy will grow by a meager 1.5% this year. "The determinants of growth for the next three quarters are already known: it's the lagged impact of previous shocks," he says. The most recent of those are the daunting cost of German unification and the valuation implosion of the most promising U.S. corporations. Both are still rippling through a European economy that may not have the dramatic short-term imbalances of the U.S., but has considerably less verve during boom times.
Germany's spectacularly troubled economy, Blanqué points out, is especially weighed down by the eastern part of the nation. Creating jobs there remains a struggle since labor costs — especially nonwage expenses like payroll taxes — have helped make German manufacturing costs among the highest in the world. Both Blanqué and Tyson believe that part of the problem is that the German mark was overvalued in the exchange rate agreed upon for the euro's launch, further hampering Germany's competitiveness. Since that poor start, though, Blanqué thinks the European Central Bank has taken more knocks than it deserves for Germany's sick state. "You can't expect monetary policy to fix Germany's structural problems," says the French economist. And so far, Germany shows no sign of fixing them, either.
While they differed in their assessments of the newcomer among the world's central banks, none of the Time economists expected the U.K. to jump into the euro zone anytime soon. "Everything that's happened in the euro zone is a compelling reason for the U.K. not to join," says Tyson. "An average inflation rate of 2% or less in an enlarged European marketplace, where you have countries with different growth and inflation rates — that's deflationary for Germany. The British look at that and say the ecb can't run a monetary policy — even if it's run well for the group — that works for an anchor player."
The British economy, warns Blanqué, is still in a bubble of inflated asset prices, one that is bound to burst; he sees a similar threat in the Netherlands and Spain. In the core Continental economies, household balance sheets remain sound. That doesn't have much effect, though, if Europeans sit on their savings, as the Japanese have been doing for years. European consumption is likely to be less buoyant in 2003 than last year. European businesses are no more disposed to invest than consumers are to spend, and their balance sheets are not as healthy. Many firms idly hoped last year to piggyback on a U.S. recovery this year, so they stayed overstaffed for too long and only began cutting jobs in the autumn, says Blanqué.
"When the cycle runs out of steam, we're left with structure," says Blanqué. If Continental Europe were to tackle labor-cost problems and the onus of untenable pension systems, maybe it could begin pulling its weight toward healing the world economy. "Europe has some easy wins if they remove impediments to growth," Tyson agrees. "But they're easy only in economic terms, not politically." Indeed, the German government has jawed on about making its labor market more flexible, but hasn't done much. And the French government is tackling pension reform as gingerly as possible, since public outrage over that issue is what brought down the last conservative government in 1997.
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