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ON THE BOARD:
(from left) Paul Achleitner, Moises Naím, Laura D'Andrea Tyson, Jeffrey Sachs and Pascal Blanque
Posted Sunday, February 6, 2005; 16.34 GMT Others find even that tepid prediction to be overly optimistic. Moisás Naím, a former Venezuelan Trade Minister who is editor of the Washington-based magazine Foreign Policy, agreed that the world economy was unlikely to crash. "But there's no doubt that America's adjustment is going to have consequences," he said. "U.S. interest rates matter to the rest of the world. They are a conveyor belt that is going to transmit shock waves to others." Rising interest rates could choke off consumption by American households, sharply curtailing imports from China, Germany and other countries that have been the motor for these nations' economies. As Paul Achleitner, a board member of Germany's insurance-giant Allianz, put it: "We must thank the U.S. consumer for all they have done in the past decade or so in terms of driving the [world economy] forward."
AMERICAN DOUBTS
The focus on American risks to the global economy is especially conspicuous, since last year's board reflected a widespread — and correct — assumption that U.S. growth would be significant and serve as an engine for the rest of the world. The concerns expressed at the time were largely about whether the Chinese economy risked overheating and whether Europe could pull itself out of a rut. Now "the perception has changed," said Pascal Blanquá, chief economist at France's largest bank, Crádit Agricole. Even though U.S. economic growth of about 4.4% last year far outpaced European growth of about 2%, "the U.S. is now more criticized, while Europe is starting to be credited for positive steps in the right direction." Significantly, he noted that the European Central Bank recently voiced open criticism of U.S. deficits for the first time. In a financial stability review published in December, the Frankfurt-based bank described the deficits as "posing a significant risk for global financial stability." Europe, by contrast, continues to run a relatively tight fiscal policy. Until the Federal Reserve's most recent increases, European interest rates have also tended to be higher than those in the U.S., and unlike spend-happy Americans, European households stash away substantial amounts of their earnings into savings. In the euro zone, about 14% of household income is saved, compared with less than 2% in the U.S.
The Bush Administration foresees a pain-free fix: continued growth, it argues, will automatically reduce the size of the budget deficit. Indeed, U.S. Treasury Secretary John Snow argues that the trade deficit is partly the result of lopsided growth. "We are growing faster than our trading partners, and we are creating more disposable income than they are," Snow said last month. "We need Europe to be more of an engine of growth and we need Japan to be more of an engine of growth." But Time's experts aren't convinced, and expect Bush will have to pare spending regardless of how strongly the economy grows. Already there are signs that momentum may be slowing: the estimated 3.1% annualized growth rate posted in the fourth quarter is the weakest in two years. Naím even predicts a battle in Washington between fiscal conservatives, who advocate a hands-on approach to managing the budget, and what he calls "starve-the-beasters" — more ideological proponents who would like nothing more than to see some public programs bankrupted. (Here, too, there are echoes of the Reagan years.) Naím expects that the fiscal conservatives will be defeated in this contest.
And none of the group, not even Tyson or Sachs, is completely ruling out a serious rupture. A devastating terrorist attack, the bursting of the bubblelike housing price increases in some parts of the U.S. and Europe, a change of policy by central banks in Asia to limit their dollar purchases — any of these could unnerve financial markets and trigger a bigger worldwide reaction, they agreed. Sachs said it would just take two or three such events to come together, "and things get a lot worse. That's not a high probability, but it can't be written off."
EASING UP ON CHINA
If there's a big question mark over the U.S., the panel's predictions for Europe and Asia are less fraught than they were a year ago. China continues to grow fast: last year its economy expanded by a breathtaking 9.5%, about the same as the last several years. The country is still sucking in huge amounts of energy and natural resources to fuel its manufacturing boom. That in turn is a significant factor in the rising prices for oil, steel and some other commodities, which is good news for producers, but — especially in the case of oil — is raising fears of a worldwide resurgence of inflation. China also has a fragile banking system that is lumbered with bad loans and a weak capital base. Thus far, fears of a "hard landing" appear to have been overblown. And the government has taken measures to curb some of the wilder excesses, including tightening conditions on some bank loans and raising interest rates to stave off inflation. But the Chinese government clearly has its limits. There was broad agreement among the panel that Chinese authorities have little interest in unlinking their currency from the dollar, despite consistent pressure to do so from the U.S. "The sanguine view is that it is not in the interest of the Asians to break the dollar link," said Tyson.
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Others find even that tepid prediction to be overly optimistic. Moisás Naím, a former Venezuelan Trade Minister who is editor of the Washington-based magazine Foreign Policy, agreed that the world economy was unlikely to crash. "But there's no doubt that America's adjustment is going to have consequences," he said. "U.S. interest rates matter to the rest of the world. They are a conveyor belt that is going to transmit shock waves to others." Rising interest rates could choke off consumption by American households, sharply curtailing imports from China, Germany and other countries that have been the motor for these nations' economies. As Paul Achleitner, a board member of Germany's insurance-giant Allianz, put it: "We must thank the U.S. consumer for all they have done in the past decade or so in terms of driving the [world economy] forward." 
