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David Ignatius

A Reign On the Wane?

By David Ignatius
Friday, January 28, 2005; Page A27

DAVOS, Switzerland -- There's a trace of what might be called the "Eliza Doolittle Factor" at this year's gathering here of global movers and shakers. Instead of the usual griping about tutelage from arrogant Americans -- who play the Henry Higgins role in the globalization drama -- there's a new note of independence and even defiance, as in Eliza's famous refrain: "I can do bloody well without you."

The Elizas say they're going their own way, Henry be damned. Every European nation has now signed the Kyoto Protocol on global warming, which will go into effect next month despite the Bush administration's disdain. The French, British and German leaders are each making star appearances here, announcing their own paths into the future as if the United States doesn't matter.

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British Prime Minister Tony Blair called Wednesday for global action on climate change, regardless of American skepticism. French President Jacques Chirac, piped in from Paris via television, proposed a new regime for financing global development through taxes on currency trading, secret bank transactions, airline tickets and jet fuel. That's the sort of big idea that's supposed to be left to the Americans, Jacques. But not this year.

Ooooo, Henry Higgins. Just . . . you . . . wait!

But they can't do without America, really. Or at least they can't ignore the consequences of U.S. actions. The United States still casts a very long shadow here, even though no senior official of the Bush administration attended the World Economic Forum this year.

The American shadow this week isn't Iraq, surprisingly enough, but the ballooning U.S. trade and budget deficits -- which are seen by the Elizas as evidence that old Henry has finally lost it for good. You hear griping about the deficits from European finance ministers, economists, bankers and hedge fund managers. They talk about the Bush administration sometimes as if it were a runaway train, but they recognize that an American financial crack-up will hurt Europe and Asia almost as much as the United States.

The concern about U.S. fiscal imbalances is shared as well by most of the American business leaders and economists I talked to here. Indeed, it's hard to find anyone who isn't concerned, except the eternal optimists who inhabit the White House.

The basic analysis runs like this: Thanks to aggressive fiscal and monetary stimulus, the United States is consuming about 6 percent more than it produces, resulting in a $600 billion trade deficit last year. To finance this extravagant overconsumption, America is in effect selling off claims on its future income, in the form of U.S. Treasury securities that are purchased by the rest of the world.

It may sound like a sweet deal for America, a bit like a group of skinny guys pooling their money to buy candy for the fat man at the head of the table. The problem is that it's unsustainable. America's debt to the rest of the world is already about $3 trillion. In another 10 years, it could total about $11 trillion. Just paying the interest on that debt will cost over $500 billion a year. But that's assuming the skinny guys will be willing to keep buying goodies for the fat guy -- which they won't.

"I'm increasingly concerned about the global current account balances," German Finance Minister Caio Koch-Weser told me. He argues that the Bush administration needs to show financial markets quickly that it is serious about bringing its deficits under control. Economist Fred Bergsten advised bankers and hedge fund managers at a dinner meeting here that, given these imbalances, "It is inevitable that the dollar will fall much further. The only question is how far, and whether it will be a free fall."

Bergsten predicts a further 20 percent decline in the dollar. He's been warning for years about a dollar crisis, but even Kenneth Rogoff, a centrist former chief economist for the International Monetary Fund who is now a professor of economics at Harvard, thinks there's a greater than even chance that the dollar will fall 20 percent. "Americans are so profligate that we're making everyone else look good," says Rogoff. He notes that even the currencies of perennial financial basket cases, such as Brazil and Turkey, have been strengthening recently against the dollar.

The Elizas of Davos may wish they could be rid of the wastrel Henry for good, but they know that's impossible. So they are watching for some sign that the old boy has come to his senses. A big test will come next week, when President Bush delivers his State of the Union speech. If he doesn't make a believable commitment to fiscal responsibility, look for the Elizas holding dollars to shout: Sell!

davidignatius@washpost.com


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