Tuesday, February 10, 2004

Amid all the confusing signals emanating from the Florida weekend meeting of the finance ministers and central bankers of the world’s seven biggest industrial democracies (G7), two major certainties glaringly emerged: There’s enough blame to go around; and the lagging economic performances of Europe and Japan require that they deserve a disproportionate share of that blame. Indeed, even the Guardian, Britain’s most prominent left-wing, anti-Bush newspaper, recently acknowledged America’s leading role at this crucial stage of the global business cycle: “Surging U.S. economy leads global recovery,” a Guardian headline blared last Friday.

Yes, all the G7 members have been pursuing worrisome fiscal policies. Yes, exchange rates are much too volatile, as the dollar since 2001 has plunged by 33 percent against the euro and 15 percent against the yen. And, yes, there are major structural imbalances among all the economies: America is running budget and current-account deficits that approach 5 percent of gross domestic product; the labor markets of euro economies remain far too rigid and inflexible; and Japan continues to be far too export-dependent.

While the G7 gang pointed fingers at one another, citing all the above, it’s worth recognizing another certainty, one that remains universal over time: The wherewithal to solve these problems, if not the incentive to address them, will be greater when all economies are simultaneously expanding at relatively rapid rates. To this end, it has been an incontrovertible fact during the past two years that the U.S. economy has been significantly outperforming the economies of Japan and the euro area. Equally important and true is the fact that the underlying fundamentals for growth for the current year are far more promising in America than in Europe and Japan.

Having expanded at a 6 percent annual rate during the second half of 2003, the U.S. economy grew by an impressive 4.3 percent during 2003, measured on a fourth-quarter-over-fourth-quarter basis. That represented a decent acceleration over the 2.8 percent growth rate achieved during 2002, which followed the recession year of 2001 during which the U.S. economy was flat. Consensus U.S. growth projections for 2004 hover around 4.5 percent. By contrast, the entire euro area will be lucky if it ekes out a growth rate of 0.5 percent for 2003. Growth for 2004 is expected to fall below 2 percent in the euro area. While America experienced a pause in 2001 after a stellar decade during which it served as the world economy’s locomotive, Japan’s economy, the Economist recently observed, “has barely grown for a decade, the worst performance of any rich country since the Great Depression.”

Moreover, for all the hand-wringing by Japan, France and Germany over America’s “unsustainable trade deficits,” it’s worth pointing out that the mirror images of America’s trade deficits are growth-enhancing trade surpluses enjoyed by the complainers. To wit: The United States has recorded 2003 balance-of-goods trade deficits (through November) of $67 billion with the euro area and more than $60 billion with Japan.

Yes, there’s enough blame to go around. America needs to accept its relatively small share — but only after Europe and Japan acknowledge their much larger share of the blame for the world economy’s recent doldrums.

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