Europe Isn't Ready to Lead.(economics)(Brief Article)

Europeans have long aspired to end America's dominance as the world's economic leader. The single market and the euro are widely seen as essential steps in this direction. But is Europe ready to lead? Do Europeans understand what it would take?

Despite a budding recovery, the United States is hardly the model of economic health that it once was. On several issues--from steel tariffs to the resurgent budget deficit to shady corporate practices--America has demonstrated a growing failure of leadership. Over the past two decades the United States has shown what it takes to be an economic superpower--a strong currency, openness to imports, concessions in trade negotiations and articulating an economic philosophy for the rest of the world. Now that it's apparently fading on so many counts, the question becomes: is Europe willing and prepared to do what the United States once did, in order to supplant it?

First the exchange-rate issue. The euro will probably continue strengthening against the dollar, if only because of America's huge and growing $400 billion-a-year current-account deficit. This means that, every year, the United States borrows about 4 percent of its GDP on world markets. If international investors lose confidence in the U.S. economy, fewer people will want to hold dollar assets. The dollar will fall--and the euro will appreciate.

This may be a normal market cycle, but there will be consequences. Among others, European companies will see their U.S. profits erode. What happens if the dollar falls farther and faster than anticipated? Are European industrial companies ready to compete with a euro worth $1.10, $1.15 or $1.25? The flip side of the much-desired strong euro would almost certainly be a surge in imports from the United States and the rest of the world. Exports might fall, resulting in job losses-- perhaps even a trade deficit for the European Union. U.S. companies have been strong competitors during the past few years, even at 90 cents per euro. That's partly because they reformed and streamlined their operations when the dollar was weak in the mid- and late 1980s. Europeans may have wasted a similarly beneficial period in recent years by not adopting reforms forcefully enough.

Europeans are rightfully angry at new U.S. steel tariffs. But given the sheer size of America's trade deficit, Washington's policies are actually relatively moderate. The question remains: if Europe were in a similar position, would its voters and politicians be equally sensitive to what's best for the global ...