TIME EUROPE
FEBRUARY 14, 2000 VOL. 155 NO. 6
PAGE ONE | TWO
Of Risks and Rewards
Nor is that the only human resource problem he saw on Europe's horizon. The most ominous is an aging population relying on pension schemes that aren't sustainable; at the other end, in Germany particularly, a higher education system that ties students down for too long and doesn't prepare them sufficiently for a competitive economy. "Flexibility is still a mot tabou in France," warned Siebert, "and in Germany we still cannot imagine that wages can be set in the marketplace like the price of a loaf of bread."
Other members of the board saw more grounds for optimism in Europe. "Europe is at the beginning of a renaissance," predicted Kenneth Courtis, Tokyo-based vice chairman of Goldman Sachs Asia. "The euro is creating a competitive marketplace almost as big as the U.S.--and in effect outside the control of any government," he argued. "The restructuring of assets means that every manager in Europe is on guard that if they don't get sufficient returns they'll get taken over."
The question is whether short-term advantages can be parlayed into deep structural improvements. Courtis saw a virtuous circle emanating from corporate retooling and tax cuts. "If you cut taxes, you can't maintain your social welfare budget," he pointed out. "If you can't maintain your social welfare budgets, you've got to reorganize your labor markets" in order to make them more flexible. But there are other forces arrayed against that pressure. The political appetite for change is not a given. "Schröder has a chance to take a longer-range view and implement some of these changes," said Siebert. "But it won't be easy for him to convince his party and the German public to get behind him."
In addition, though the weak euro--down from $1.17 at its birth a year ago to below $1 last week--has been a boon to European exporters and to economic activity, Hormats worried that its slide has taken some of the pressure off structural reform. Should the dollar fall sharply against the euro before important changes to Europe's competitiveness take place, unemployment could soar even higher than in the last recession.
Still, by any measure, the prospects for adjustment in Europe are better than those in Japan, which is trapped, as Courtis put it, "in a vice of demographics, deflation and debt." He warned against taking too much solace from last year's anemic 1% growth, which came only due to massive spending and worsened an already dismal fiscal picture. "The Japan of today makes the Italy of yesterday look like a paragon of fiscal rectitude," said Courtis. "The country has to engage in a reform agenda of a magnitude we've seen rarely in a modern country."
Courtis was concerned that overall corporate investment in high tech is falling sharply behind that in the U.S. Consumer spending is still trending sharply down and demographic forces are also hurting. In 1998, Courtis pointed out, Japan crossed a threshold anticipated with fear by the rest of the developed world: the point at which there are more retirees withdrawing funds from the pension system than there are workers contributing to it. "It would be really unwise to underestimate the level of political turmoil possible as Japan reforms," Courtis warned.
The only way out, according to Courtis, was for the Bank of Japan to reflate its economy by printing money. That approach to dealing with its debt load, he said, would mean a torrent of money leaving Japan and pushing equity markets higher (or at least putting a floor under their decline). But it would also mean a lower yen and thus more attractive Japanese exports. Though other economies might be leery of that, Courtis suggested they should prefer a low yen to a deeply indebted Japan. "You can't have it both ways," he said.
With Japan enmeshed in its internal problems, the rest of Asia "has come out of the bottom of the valley," claimed Victor Fung, chairman of the Hong Kong Trade Development Council. Export growth is so strong, in fact, that Fung was concerned that "we may have come out of recession too early to get fundamental reforms." The region remains enthralled by a familiar theme: the emergence of China. Its entry into the World Trade Organization later this year, said Fung, "signifies China taking its full place in the world." The prospects for growth are immense--Fung noted, for instance, that services currently make up only 30% of the Chinese economy, as against 85% in Hong Kong. The Internet revolution is a clear vector for change: some 80 million Chinese already have cable access, and the number of Internet users is doubling every six months.
If Asia has begun to search for new paths back up the mountain to prosperity, much of Latin America is still heading downward. No region offers a more sobering picture of how volatility translates into vulnerability than Latin America. In 1999 it was the financial fallout from nature--El Niño, 1998's Hurricanes Georges and Mitch, the floods of coastal Venezuela--that buffeted the region, but a collapse on Wall Street could have a no less devastating effect. Moisés Naim, editor of the Washington-based journal Foreign Policy, noted that 1999 set a series of dismal records for Latin America: the highest unemployment rates ever recorded; the highest fiscal deficits in a decade; a near-unprecedented collapse of foreign investment and trade. By necessity, said Naim, "the Latins are now the best in the world at managing crisis."
Mexico is a comparative bright spot in the region, as are other countries directly in the ambit of U.S. foreign investment. But the prospects for the entire region, and emerging markets generally, depend on whether Greenspan and the Clinton administration can engineer a soft landing if there is a major adjustment in the frothy U.S. technology sector. "It is wrong that a crash in the U.S. could benefit emerging markets," said Naim. "Experience shows that a correction leads to a flight to quality--not to emerging markets."
Such a correction doesn't have to mean a world economy left in tatters. A 35-40% slide on the New York Stock Exchange would surely wipe out the wealth effect and decimate public confidence. But, Courtis argued, the fundamental transformations brought about by globalization and the Internet would continue, providing a foundation for another boom. Besides, the Board argued, economic policymakers have fine-tuned their ability to prevent the sort of stock market meltdown that could lead to global dislocation. As Hormats put it: "Investors have a greater sense of confidence that when the markets go down, governments know how to deal with it." But no one wants to see that confidence put to the test.
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