The TIME economists generally greeted the fall of the dollar against the euro as a "win-win" for both sides. Blanqué says Europe can take advantage of dampening inflationary pressures (due to cheaper U.S. imports), and that a lower dollar encourages European investors to look more closely at opportunities at home instead of in the U.S. Washington likes the new exchange rate, too, Hormats says. Not only does it improve the U.S. trade position, but it pressures Europe to face the music of internal reform rather than cheat by letting its exports ride on a cheap euro.
But if the dollar's slide becomes a free fall, everyone could end up a loser. Foreign investors could stop funding the U.S.'s massive external debt, choking off the already sputtering engine of American consumption. Europe's strong showing in exports, vital to its health, would suffer from higher prices. "Remember," says Tyson, "Germany had the highest manufacturing costs in the world before the rising euro."
How bad is Germany's growth? Well, along with Italy, it's doing worse than deflationary Japan, says Courtis. Not that anyone should take any solace from that, since it took a massive fiscal stimulus from the Bank of Japan to get the world's second-largest economy to show a pulse at all — a stimulus that it cannot continually administer. Taking government, corporate and personal debt together, he says Japan's red ink amounts to five or six times the country's GDP — "a Himalaya of debt" twice the size of the one suffered by a bombed and exhausted Britain in 1945. "A lot of that debt is bad debt, so we could have a write-off of $3.5 trillion still ahead of us," Courtis says. He acknowledges that Prime Minister Junichiro Koizumi and Finance Minister Heizo Takenaka have "started saying the right things," but he's far from confident they can pull off the reforms needed to undergird an economy that remains, he says, "the biggest zone of risk" in the world.
If the Forum's Annual Meeting had taken place just west of Japan, the Board of Economists agreed, the level of optimism would have been far higher, because China's emergence as an economic power, says Courtis, "is the kind of phenomenon the world sees once every 300 years." The Chinese economy is now the size of Italy's; in a matter of years, it will be the size of Germany's; in a decade or so, it could rival all of Europe. And recently, Beijing hasn't been making many mistakes. "Good year, bad year, the [Chinese] government continues to engage in the most aggressive, politically difficult and complex reforms," says Courtis. Those policies have assured not only that China's labor force can work for the market, they have also assured that they can read — 94% of them — giving the country a "huge capacity to absorb new technology," says Courtis. Thanks to booming factories, China is now a formidable exporter, as well as the major importer from all of Southeast Asia.
Managing explosive growth by decree is easier than husbanding mature wealth in a democracy. Perhaps that's partly why China is the only major country whose economic policies didn't come in for a degree of harsh criticism by the Board of Economists. But there are still questions about the governability of the world's most populous country. "China will have an accident, whether financial or political," warns Naím. "The question is, will it be a 1990s-style accident, where a country crashes and recovers? Or will it be a 1960s-style accident, like the Cultural Revolution, that could last a decade?"
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