Europe Isn T Ready To Lead

Despite a budding recovery, the United States is hardly the model of economic health that it once was. On several issues–from steel tariffs to the resurgent budget deficit to shady corporate practices–America has demonstrated a growing failure of leadership. Over the past two decades the United States has shown what it takes to be an economic superpower–a strong currency, openness to imports, concessions in trade negotiations and articulating an economic philosophy for the rest of the world. Now that it’s apparently fading on so many counts, the question becomes: is Europe willing and prepared to do what the United States once did, in order to supplant it?

First the exchange-rate issue. The euro will probably continue strengthening against the dollar, if only because of America’s huge and growing $400 billion-a-year current-account deficit. This means that, every year, the United States borrows about 4 percent of its GDP on world markets. If international investors lose confidence in the U.S. economy, fewer people will want to hold dollar assets. The dollar will fall–and the euro will appreciate.

This may be a normal market cycle, but there will be consequences. Among others, European companies will see their U.S. profits erode. What happens if the dollar falls farther and faster than anticipated? Are European industrial companies ready to compete with a euro worth $1.10, $1.15 or $1.25? The flip side of the much-desired strong euro would almost certainly be a surge in imports from the United States and the rest of the world. Exports might fall, resulting in job losses–perhaps even a trade deficit for the European Union. U.S. companies have been strong competitors during the past few years, even at 90 cents per euro. That’s partly because they reformed and streamlined their operations when the dollar was weak in the mid- and late 1980s. Europeans may have wasted a similarly beneficial period in recent years by not adopting reforms forcefully enough.

Europeans are rightfully angry at new U.S. steel tariffs. But given the sheer size of America’s trade deficit, Washington’s policies are actually relatively moderate. The question remains: if Europe were in a similar position, would its voters and politicians be equally sensitive to what’s best for the global economy? Would European politicians be able to face the incredible pressures that would build for protectionist measures if it were Europe, and not the United States, that ran a persistent and substantial trade deficit? Not likely, I fear.

Similarly, the question remains whether Europeans are ready to assume responsibility for the success of ventures like the World Trade Organization. In the past the United States often “greased the wheels” of trade negotiations by offering more concessions than would be dictated by strict bargaining strategy. Now U.S. domestic opposition to being the “importer of last resort” is growing. Witness those new tariffs on imported steel and lumber. We can expect the same for textiles, garments and sugar.

America’s retreat from its leading role presents an opportunity for the European Union. Trouble is, its political institutions have yet to mature to the point where they can resolve trade disputes, say, by looking beyond the immediate and narrow self-interests of its member states. One example is agricultural subsidies, which, among other negative effects, harm developing countries. America no longer has the right to lecture other countries in this regard, after the farm bill recently passed by Congress. But that does not absolve Europe from undertaking its own reforms.

Ultimately, the most important task for either Europe or the United States is to provide a model for successful global growth and development. It’s no accident that, in the 1990s, U.S.-style market capitalism became fashionable worldwide. Who could argue with success? But a weaker U.S. economy may leave much of the developing world without a successful example for economic self-management. Does Europe present an alternative? Hardly. Europeans have for too long been afraid to discuss some of the more unpleasant truths about their economies–and the reasons for Europe’s high unemployment and low growth in recent years.

Europe’s chance for economic leadership may come sooner than expected. But too many Europeans haven’t yet grasped the basic secret of America’s leadership–the hard work and tough choices that are involved. That’s what Europeans now face, in this season of elections and decision making that will shape their future. Let’s hope they recognize that such sacrifices will pay off for them, well as for the rest of the world.