WHICH ECONOMY WOULD YOU BET ON?

A declining dollar will put Europe on edge (Moises Naim, May 18 2003, Financial Times)

The first and most obvious consequence is that Europe will be flooded by American exports, while the US will see a surge of European tourists whose apprehensions about George W. Bush's unilateralism will be tempered by inexpensive opportunities to take the children to Disney World. Americans will not switch to Californian wine because of France's vote in the UN Security Council but because French wine will become more expensive.

The fall of the dollar will make life more difficult for European industries while making American companies more competitive. The US private sector has already been sharpened by its ruthless and profound restructuring in response to the bursting of the stock market bubble, a slow economy, corporate scandals and the shock of terrorism and war. In contrast, Europe's labour market rigidities, heavy business regulation and closed corporate ownership structures have reduced the ability of many of its companies to react swiftly to changes in the global economy.

A cheaper US dollar will be a big challenge for European corporate leaders, for public policymakers and for union leaders. Managers in the eurozone will face unprecedented pressures to cut costs, policymakers to save and create jobs and union leaders to protect the generous benefits that they have secured for their members over the years. A strong euro could spur the creation of the coalitions needed to undertake long-awaited and so far postponed structural reforms.

But the reform agenda is so daunting, and implies such wrenching social and political rearrangements, that European governments may be tempted to retreat instead behind subsidies and protectionist barriers. [...]

All this suggests a paradox: that a weak currency is not always a sign of weakness. The US seems well equipped to minimise the negative consequences of a sharp devaluation of its currency while taking immense advantage of the opportunities it creates. A big factor in this is the flexibility and adaptability of the US economy, particularly of a private sector that is less fettered by regulations than its European counterpart and that must try to satisfy demanding shareholders.

The European decision to keep the euro artificially high, in order to maintain the delusion that the continent still matters, just keeps looking like a bigger and bigger mistake--and the odds against them undertaking serious reform are astronomical. Posted by Orrin Judd at May 19, 2003 8:23 AM