A serious danger looms over the otherwise robust global economy, and the tough measures needed to reduce it are clear. On that score, there was almost unanimous agreement among the dark-suited policymakers from around the globe who converged on Washington this weekend for the spring meetings of the International Monetary Fund and World Bank.
One after another, in public declarations and private conversations, officials from the world's leading finance ministries and central banks concurred that financial turmoil triggered by a plunge in the U.S. dollar could erupt sometime in the future unless strong steps are taken to shrink "global imbalances" -- the massive U.S. trade deficit, and the corresponding trade surpluses of other countries, especially Asian ones. The result "could be disruptive and very damaging to the world economy," warned Sultan Bin Nasser Al-Suwaidi, governor of the United Arab Emirates Central Bank.
So what are these powerful people doing to prevent this dire threat from materializing? Not much, many of them admitted. As Raghuram Rajan, the IMF's economic counsellor, put it: "Their attitudes toward the needed policy changes seem much like St. Augustine's -- 'Lord, give me chastity . . . but not just yet.' "
That is not for lack of a broad consensus on the needed changes. At a high-level IMF meeting Saturday, participants from rich and poor countries alike issued formal statements repeating, in one form or another, what Swiss Finance Minister Hans-Rudolf Merz called "the well-known mantra": The U.S. budget deficit must be sharply curtailed; that would dampen the over-consumption by Americans that draws in a flood of goods from overseas. The sluggish economies of Europe and Japan must be revived with growth-inducing reforms; that would enable them to pick up the slack and import more when U.S. consumers finally become less free-spending. And Asian economies, particularly China, must let their currencies rise; that would eliminate an unfair competitive edge their exporters enjoy against products made elsewhere.
The Bush administration declared itself fully behind that set of prescriptions, including the part about Washington's budgetary responsibilities. Following a meeting Saturday of top officials from the Group of Seven major industrial nations, Treasury Secretary John W. Snow said, "Deficits matter, they are unwelcome, and must come down," and he reiterated the U.S. commitment to President Bush's goal of cutting the budget gap to less than 2 percent of gross domestic product by 2009, from about 3.5 percent of GDP now.
"I'd underscore, this isn't just words," Snow said, referring to the G-7's call for "vigorous action" to address global imbalances. "It's an action plan."
Such stirring rhetoric, however, is belied by recent developments in major economies.
In the United States, figures released this month show that the budget deficit for the current fiscal year is running close to last year's record $412 billion, a problem that will only worsen when Congress approves $80 billion in emergency spending for the wars in Iraq and Afghanistan. More important, the willingness of Congress to enact the spending cuts proposed by Bush has come under fresh doubt following rebellions by Republican lawmakers against reductions in Medicaid and farm subsidies. And in the latest sign of Washington's eagerness to reduce taxes rather than raise them, the House just voted to repeal the estate tax permanently.
Across the Atlantic, a slowdown in continental Europe has prompted economists to slash their forecasts for the zone of countries using the euro currency; the IMF predicts growth at an anemic 1.6 percent this year. With unemployment in those nations averaging nearly 9 percent, hope that the European Central Bank might respond by lowering interest rates was dashed when Jean-Claude Trichet, the bank's president, told reporters after the G-7 meetings, "A decrease of rates is not an option" because of worries about inflation.
Meanwhile, European politicians have announced moves in the past few days that are arousing despair among economists who believe the continent will achieve dynamic growth only by lifting the heavy hand of government protection from labor, product and capital markets.
In Germany, the government -- responding to widespread concern about low-cost eastern European workers invading the German market -- has proposed a plan that includes setting a minimum wage equal to the lowest wages negotiated by unions and employers' associations. Separately, the European Union's executive body retreated from a proposal to open up the continent's service markets to greater cross-border competition.
"The problem is not complacency," said a senior European policymaker who attended the G-7 meeting and agreed, on condition of anonymity, to discuss the sentiments expressed behind the scenes about global imbalances. "It is not a lack of recognition that we have a real risk. But the problem is delivery. We have to fight against the difficulty of running modern democracies."
The dangers of failing to act were spelled out in IMF reports issued on the eve of the meeting.
The U.S. trade deficit, at a bit more than $660 billion last year based on the broadest measure, has risen to about 5.7 percent of GDP -- a far higher proportion of the economy than at any time in history. IMF projections show that if the trade gap continues to expand as currently anticipated, the collective indebtedness of the United States to other nations will mount steeply over the next half-decade. That is because as U.S. consumers buy imported cars, clothes and electronic goods, the dollars they pay end up in the hands of foreigners who effectively lend those greenbacks to the United States by investing in U.S. Treasury bonds and other securities. By 2010, the net indebtedness of the United States will roughly double as a proportion of the economy, to 50 percent of GDP, according to the IMF.
That doesn't have to spell disaster, because as some private economists contend, foreigners may well be willing to continue lending to the United States far into the future -- as they have up to now -- given the dearth of good alternatives. But the higher U.S. indebtedness rises, the greater the chance that foreigners might get worried that the United States' burden is getting out of hand, prompting them to dump the Treasury bonds they have accumulated.
Part of the reason that scenario has not galvanized policymakers to take more-ambitious preventive measures, according to some attendees at the weekend meetings, is that the global economy has been expanding briskly and shows scant sign of faltering. The IMF projected global growth at 4.3 percent this year and 4.4 percent in 2006, down from last year's 5.1 percent pace but still plenty healthy. "In private, there is agreement that there has to be multilateral movement [on imbalances], but the fire is not under them," said one senior international official who attended the meetings. "Until such time as that happens, there may be more willingness to procrastinate."