Focus on growth, not backbiting

Is the dollar a moral issue? The recent coverage of the currency's decline seems to suggest that it is. The main problem, we are told, is the current account deficit - the greedy US buys more than it sells.

"America's dangerous game" is how Germany's Süddeutsche Zeitung recently described the US currency situation. Earlier this month Karl-Heinz Grasser, the Austrian finance minister, described US deficit levels as "unacceptable". Then there was last month's criticism from Li Ruogu, deputy governor of the People's Bank of China. "The savings rate in China is more than 40 per cent. In the US, it is less than 2 per cent. So the problem is that they spend too much and save too little," he said. As the Financial Times put it in its headline to the interview: "China tells US to put its house in order."

It is a bit odd to find US trading partners scolding the US as if it were a 17-year-old just returning from the shopping mall. After all, economies are more like businesses than families. The American "business" would not buy more than it sold if it were not growing faster than many of its fellow "businesses" - Europe, say, or Japan.

What is more, when businesses err, authorities do not need to punish them. The market does that job. And has done it - some would argue - by pushing the dollar down.

But what is behind the sanctimony? The Chinese treasure stability and fear the disruption of a further dollar slide. So, one can argue, they are berating the US for not maintaining the status quo. Europeans resent the weak dollar because it hurts their exports - this is understandable, especially if you come from an export-focused culture.

But there is also another desire behind the scolding impulse: a desire to pre-empt criticism, to move attention away from the shabbier corners of one's own currency area by shining the spotlight on the US currency.

Consider China and its dollar currency peg. China is growing fast but it has not yet done all the reforming it needs to do to be a free and powerful economy. It has so far also been unwilling to protect intellectual property rights or, often, permit the free flow of information (the state-monitored internet hubs in Beijing or Guangzhou censor and restrict just as much as government telegraph offices did in their day). China has also been unwilling to privatise when it should. Big problems can result, as the recent scandal at China Aviation Oil reminds us. CAO is itself a contradiction - a publicly traded company (listed on a Singapore exchange) that is also owned by the Chinese state. Such contradictions are inherently unstable, especially when they involve oil.

The truth is that China chooses to live under the US monetary and financial umbrella in part because that allows it to hide from its own reform obligations. As Larry Kudlow of Kudlow and Company, a US research firm, has noted, China is so unwilling to reform that it is even content to endure the humiliation of being an extension of the US monetary empire - a sort of 13th district in the US Federal Reserve system.

Then there is Europe, where, for decades, old, inflexible social institutions have slowed growth. There is an additional problem - future pension obligations. Europe's embarrassment is that it has an insufficient "replacement rate" - younger generations are producing too few children to sustain the retired and retiring cohorts. Some of the same Europeans who like to moralise about the dollar are themselves to be found this Christmas season at the mall - the American mall.

They are there, snapping up the extraordinary bargains of faux furs, thanks to the fading dollar. (For the sake of argument, we might ask: why are these happy-go-lucky people not at home knitting their brows over their nations' fiscal troubles, lending moral support to budgetary reform and reproducing to improve their national replacement rates?)

As always, it is easier to complain about American waste than to address delays to reform at home. Recently, the European Union agreed its long-awaited directive on cross-border mergers. The hope was that the directive would do away with old inefficiencies, and it does - in some ways. But it also says that the German rule of Mitbestimmung - co-determination - under which employees hold one-third of the seats in the boardroom will apply when German companies merge with non-German ones. A cold war-era relic that has already killed many thousands of German jobs may now kill some non-German jobs as well.

The US, of course, also plays the blame game. John Snow, the Treasury secretary, is one of the best possible choices to plan the administration's tax reforms. But his habit of alternately berating the Chinese and pleading with them to loosen their peg to the dollar is faintly silly.

Mr Snow is avoiding the difficult fact that vast parts of US industry can no longer compete with China.

This brings us to the main point. All this scolding is itself a shame, for it tends to drown out the most important conversation - the one about growth. To continue to grow as fast as it has without bankruptcy, the US needs to cut spending and reform pensions and health costs. To continue to grow as fast as it has without crashing, China needs to strengthen the rule of law and financial systems. To grow as fast as it once did, Europe needs to liberalise. We can talk a currency up and we can talk it down - for a while. But in the end, a currency is simply the common stock of its country. It is the country, therefore, and not the currency, that merits our attention.

© Copyright 2004 Financial Times

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