Landing Hard on Europe.(U.S. foreign exchange)

The White House is an increasingly lonely home for those who think "deficits don't matter," as Dick Cheney famously put it. With the U.S. current-account deficit at $550 billion and rising, and investors dumping the dollar, the camp of deficit hawks grows daily. In the past two weeks, former U.S. Treasury secretary Robert Rubin coauthored a paper citing the problem, Federal Reserve governor Dan Kohn gave a speech warning of its risks and the International Monetary Fund issued a scathing report on Washington's budget deficit, as if the United States were some rickety emerging market in need of a good scolding.

Washington faces two options for righting its red ink. One is to cut the deficit, perhaps by raising interest rates to discourage borrowing, but that risks choking off recovery as the November election approaches. The other is to let the dollar fall, making it cheaper for foreigners to fund America's shopping. Federal Reserve chairman Alan Greenspan made the U.S. choice plain when he told a Berlin audience last week that the dollar's decline was not a worry.

The United States has the advantage of owing money in its own currency, thanks to the fact that the dollar happens to be the world's reserve currency. This prevents a weaker dollar from triggering the kind of meltdowns that hit emerging markets in the 1990s. These crises exploded precisely because countries like Thailand, Mexico and Argentina borrowed heavily in a foreign currency. The fall of the baht and the peso make it impossible for local governments or banks to repay dollar loans, leading to widespread defaults.

So far, the slide has been smooth, at least for the United States and Asia. The Bush campaign is getting exactly what it wants, because a weakening dollar fuels U.S. deficit spending (Austin, Texas, home buyers can get a mortgage with no money down) and export sales. Asia is not hurt, either. With the yuan pegged to the dollar, China's exports are still streaming onto American shelves at steadily low prices, damping the threat of inflation that often follows a falling currency. Indeed, Greenspan last week ruled out inflation as an immediate threat. That leaves all the pain of the falling dollar on Europe's head. Over the last two years, the dollar has fallen 15 percent against a broad basket of currencies, and 40 percent against the euro. Much of corporate Europe is well hedged, but nervous politicians in France and Germany have launched a campaign to talk ...