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Europe's Big Test (Int'l Edition)


International -- European Cover Story

Europe's Big Test (int'l edition)

Can its leaders continue pushing reform to keep growth on track?

During much of the last decade, the view from the World Economic Forum in Davos, Switzerland, has been remarkably unvarying. It has looked something like this: In the foreground, a geriatric, somewhat insecure Europe groped its way toward more and more extensive economic integration. Further to the east lay the vast and messy ruins of postcommunist Russia. Asian tigers like South Korea and Thailand, once the 1990s' hot investment tickets, had imploded by 1998. Japan seemed to reel from crisis to crisis, unable to recover from the bursting of its economic bubble at the end of the 1980s, and the China market was more of a promise than a reality. Towering over the entire landscape was the U.S.

America has been the globe's one "hyperpower." Indeed, that memorable Star Trek-like term was coined in early 1998 by French Foreign Minister Hubert Vedrine to describe the overwhelming political, economic, and cultural might of the U.S. over the last decade. The world after the cold war seemed to have an unmistakably American accent, whether it was in the way Microsoft Corp. and Intel Corp. dominated the unfolding Information Age or the virtually unchallenged authority wielded by the U.S. military and diplomats. And fittingly, the decade began with the greatest show of strategic might since World War II, the U.S.-led gulf war coalition against Iraq.

Now, as the son of the architect of that grand coalition takes the reins of power in Washington, the world view from Davos is starting to mutate. Suddenly, U.S. power doesn't look quite so lofty or dominating, despite President George W. Bush's promises to revive defense and reignite the economy with history's biggest tax cut.

It is not that U.S. might has diminished. Simply put, it's a more level playing field out there. In turn, the yawning, decade-long differential in growth rates between the U.S. and Europe is set to disappear. And Asia--apart from Japan--is growing again at near white-hot rates. Over time, growth differentials do matter: Over the last eight years, the differential alone in American and European growth rates amounted to $600 billion--a sum equivalent to the gross domestic product of Spain.

But this new reality is about more than just the end of a business cycle in the U.S. Europe is more economically self-confident than it has been in at least a generation (page 49). Russia, under the no-nonsense hand of Vladimir V. Putin, seems at last to be stabilizing and slowly picking itself up. And China, which slowed down some in the Asian crisis, is again turning in one of the best economic performances on the globe, even as it seeks a new entente with Russia and keeps up the pressure on Taiwan, developments that already seem to be unsettling the newly installed Bush Administration.

This shift in fortunes could ratchet up the tension between the U.S. and its rivals and allies. Take trade issues, normally the mind-numbing stuff of bureaucrats in Brussels, Geneva, and Washington. Over the past decade, friction over items like bananas and beef hormones has provided a steady background noise to U.S. and European relations. Sure, tempers flared--but differences were never allowed to throw the transatlantic political alliance into question.

That could change now. After all, in key industrial sectors, Europeans are beginning to mount some credible and sustained challenges to traditional American domination. There's no better example than aerospace, where Europe's aggressive Airbus Industries has grabbed 50% of global orders for new passenger jets, taking a huge bite out of America's largest single exporter, Boeing Co. Airbus' proposed 550-seat-plus A380 superjumbo has already racked up no less than 60 orders, most recently in mid-January from freight giant FedEx Corp., the company's first American customer. Not everyone likes that. Zeroing in on $2.5 billion in loans that European governments are lavishing on the A380 development, former President Bill Clinton was stunningly direct in a Washington meeting with French President Jacques Chirac last December. The loans, the White House said, could become "a serious problem affecting the U.S.-EU relationship."

Bush will not find it easy to navigate through the aerospace industry's minefield. Not only trade balances and hundreds of thousands of jobs are at stake but national prestige as well. "I do worry that trade could cause the U.S. and Europe to drift apart," says Arnold Kanter, who served as Undersecretary of State for Political Affairs in the early '90s. "Airbus could be the issue that triggers this."

The U.S. faces similar challenges in the New Economy. Sure, there is nothing remotely comparable in Europe or Asia to Microsoft and Intel. But then again, the "Wintel"-based PC-centric view of the universe is itself quickly morphing into something much more mobile, an area of expertise that plays to the strengths of the Europeans and Asians. Finland's Nokia and Sweden's

Ericcson have a hammerlock on the mobile telephony market. Equally strong are the European semiconductor companies who service the mobile world: Franco-Italian ST Microelectronics, Germany's Infineon Technologies, and Holland's Phillips. Even Texas Instruments, a leader in this sector, bases its mighty wireless division in France. Japan's NTT DoCoMo and Fujitsu have similar expertise. Both Europeans and Asians want to create a mobile network that will challenge the fixed-wire universe. Says Richard Branson, the brash founder of Britain's Virgin Group PLC: "The U.S. is very behind in mobile telephony, impeded by factors such as the fact that they don't have national networks yet."

Whatever happens, the move away from a unipolar world stands to be a long-term, sometimes painful process. But it does not have to be a zero-sum game in which gains by Europe or China, say, automatically translate into losses for the U.S. America, for one, will need to tap into growth prospects wherever they are.

David L. Aaron, who often clashed harshly over Airbus subsidies and intellectual-property rights with Europeans and Asians as Clinton's Commerce Undersecretary for International Trade, knows this well. "If there is to be a recession in America, the only place to look for any potential dynamism is going to be Europe," he says. If the U.S. helped pull along the rest of the world over this last decade, it may be time to shift the burden.By John Rossant in ParisReturn to top


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