January 26, 2005
By David E. Sanger The New York Times
International Herald Tribune
WASHINGTON After a first term in which terrorism and war dominated President George W. Bush's foreign policy agenda, his allies in Europe and Asia suspect that his next confrontation with the world could take on a very different cast: a potential monetary crisis, in which a steep plunge in the value of the dollar touches off economic waves around the world.
Already, the tensions over the dollar are becoming a recurring source of friction, a conflict that does not reverberate as loudly as the differences over Iraq but may be as deeply felt.
At a meeting in Paris on Monday, the finance ministers of Germany and France complained that Europe had unjustly borne the brunt of the dollar's downward slide, and called for coordinated action to stop it.
"Europe has until now paid too big a share in this readjustment," Hervé Gaymard, the French finance minister, said bluntly.
His German counterpart, Hans Eichel, said the United States needed to reduce its deficits, adding, "Each one has to play its role."
Two months ago, similar sentiments came from Wen Jiabao, China's prime minister. Beijing is at the center of a struggle with Washington over currency policy.
Wen complained about the fall of the dollar, asking, "Shouldn't the relevant authorities be doing something about this?"
In an interview before Bush's inauguration, Treasury Secretary John Snow played down the tensions.
"We understand that deficits matter," he said, insisting that the tight budget Bush is expected to send to Congress next month should give foreigners and the financial markets the solace they seek.
But should the dollar continue to fall - if, for example, global investors decide that Bush does not have the will to keep spending down - it would not only exacerbate tensions, analysts said.
A decline in the dollar might also force up interest rates at home to keep foreigners interested in financing America's need to borrow more than $600 billion a year to cover its gap in the current account. The current account is the broadest measure of the trade and financial flows into and out of the country.
To be sure, the dollar's fall may never reach crisis levels, and in the last few weeks, after a more or less steady decline over the last three years of almost 35 percent against the euro and 24 percent against the yen, the dollar has stabilized a bit.
Many experts argue that a further decline, if relatively modest and gradual, is entirely manageable.
Administration officials, along with a number of like-minded economists, contend that the record U.S. trade and current-account deficits are not particularly worrisome, a reflection more of strong foreign interest in investing in the American economy than any sign of global weakness.
But across Asia and Europe, a range of officials and analysts worry that Bush's economic team may not be up to the challenge of grappling with the issue. They contend that Washington has retreated from efforts to marshal the biggest economies of the world into a mutual effort at more robust and balanced growth.
Many European politicians and exporters cannot shake the suspicion that the Bush administration, despite its statements supporting a strong currency, has been perfectly happy to watch from the sidelines while the dollar heads down.
At a moment of surging American trade deficits that have reached a record share of economic output, a falling dollar makes American exports more competitive and puts imports from Europe at a particular disadvantage.
"It's hard to tell an entrepreneur to wait two years for a policy to change when he says, 'I've got to deliver my goods tomorrow,"' said Anton Börner, president of BGA, the Berlin-based association of wholesalers and exporters.
Snow, for his part, paints a vastly different picture of the international economic landscape. He described the current situation as one in which America remains the economic envy of the world, where yawning deficits are being addressed, and where there is little risk that foreigners will rethink the wisdom of lending the United States hundreds of billions of dollars a year to finance the trade gap and to cover the vast borrowing needs of the government.
Snow suggested that some in Europe were seeking a convenient scapegoat, particularly after the tensions over Iraq, to blame for the Continent's own inability to generate stronger growth.
"The current deficit levels are too large," Snow said, describing himself as a deficit hawk who sees a chance to cut spending because the American economy is growing again. "They have to come down," he said, "and they will come down."
But deficits aside, he argued, "overwhelmingly, the United States is looked at as the model for success."
After years of stagnation in money flowing into the government, "revenues look good," and the turning point will come in a couple of weeks, he said, when Bush sends a budget to Congress in which "you will see a number of programs that not only don't grow at the rate of inflation, but that decline."
While the budget is a domestic document, assessments of whether it will realistically grapple with the underlying problems and whether Bush has the political will to push tough measures through Congress may determine whether investors around the world stick with the American economy or head for the exits.
No one knows for sure if the doubts that have already contributed to the dollar's decline will intensify. Some worry that the markets may conclude that Bush will put the financing of the Iraq war, military transformation, and the costs of revamping Social Security ahead of deficit reduction. Others fret about the risk that a large, highly leveraged hedge fund or a big bank could be caught betting the wrong way in the markets, touching off a sudden currency sell off that could have implications for the rest of Bush's term.
"We're at a critical juncture," said C. Fred Bergsten, director of the Institute for International Economics and a persistent critic of how Bush's team has handled its global economic role. "The imbalances get worse and worse," he said, rivaling Japan's in the mid-1990s.
"The projection is that they keep rising," Bergsten added, noting that the current-account deficit is more than 6 percent of the U.S. gross domestic product. "And it is a trajectory that is bound to crack: People will stop buying dollars, and domestic politics will make the soaring trade deficit with China just unsustainable."
Despite all those fears, foreign investors are still buying American.
While much of that lending last year came from central banks abroad, private investors have shown renewed confidence lately. In November, the most recent month for which there are reliable numbers, foreigners made net purchases of $81 billion, enough to easily pay for the amount by which American imports exceeded exports.
"Our growth rates are still higher, over the long term, than Europe's and Japan's," said Daniel Ikenson, a trade policy analyst at the conservative Cato Institute. Given that, for foreign investors, "there is no reason to think they will sell."
But the argument around the world is as much about leadership as about the long-term strength of the economy. Unlike the debate over the war in Iraq, in this case the complaint is not about American unilateralism, but American retreat.
To America's allies, the era in which the world's largest economy also seeks to be the world's economic leader has simply halted. Under both the Republican James Baker 3rd and the Democrat Robert Rubin, the Treasury Department was viewed as one of Washington's most powerful institutions. It flexed its muscles to trim the market's extremes and stem crises, from an excessively strong dollar in the 1980s to the currency collapses of the 1990s that stretched from Latin America to Asia to Russia.
There has not been an economic crisis of significant magnitude since Bush came to office. John Taylor, the Treasury under secretary for international affairs, said that is partly a result of preventive maintenance. "My first days on the job, we had a crisis in Turkey and one coming in Argentina and Brazil," he said. "Both were contained."
Today, the Treasury is regarded as a vastly diminished institution, with comparatively little influence in the White House. Bush is seen, rightly or wrongly, as far less comfortable dealing with global economic management than he is sitting in the Situation Room, buried in the details of the Iraqi insurgency or Iran's nuclear threat. As a result, the weakening dollar, to the minds of many from Hong Kong to Berlin, is a metaphor for a presidency so distracted by national security issues that American economic influence has ebbed.
Washington's lack of success so far in pressuring China to finally allow its currency to float, or at least appreciate significantly to reflect its vastly stronger economy, is cited as the most striking evidence of Washington's diminished economic influence. Beijing has used other issues, chiefly the Bush administration's dependence on China to help prevent North Korea's development of nuclear weapons from touching off a wider conflagration, to keep currency demands on the back burner.
That has contributed to a Chinese export surge that has soared to levels almost no one predicted when the United States, Europe and China reached agreement on the accord that brought Beijing into the World Trade Organization at the end of Bill Clinton's presidency.
And the Chinese, like the Japanese in their heyday, have begun to question American economic policy. U.S. officials say that the Chinese could solve a lot of problems by not linking their currency to the dollar, a step toward solving a trade surplus that looks set to hit a record of nearly $200 billion for 2004. It is a subject of enormous political sensitivity in Beijing, because of its effect on the breakneck pace of China's economic growth.
But Taylor, the Treasury official, said that teams of officials visited China to offer advice about how to manage a floating currency and that the Chinese last year hired the Chicago Mercantile Exchange to help them develop a market in currency futures.
"You don't do that," Snow said, "if you are planning to keep the currency pegged to the dollar."
China is only one piece of the global economic puzzle. The lack of interest by Bush and Snow to put together a global accord on currencies, akin to the Plaza Accord that Baker organized in 1985, is viewed as evidence that Washington is content with the downward drift of the dollar. And there is no economy to replace the American role.
"It will be a world of chaos without a center," said Hideo Kumano, a senior economist at the Dai-Ichi-Life Research Institute in Tokyo.
This article reported by David Sanger, Mark Landler and Keith Bradsher.
http://www.iht.com/articles/2005/01/25/business/dollar.html