World Economic Forum at Davos: Still Standing

  • Photograph by Mauricio Alejo for TIME

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    Fact is, investors appreciate such honesty. The world's leading companies know enough about emerging markets by now not to be fooled by happy talk. So notwithstanding their reservations about, for example, Russia — including lingering doubts about its justice system, epitomized by the long legal troubles of erstwhile oil magnate Mikhail Khodorkovsky — business leaders from the U.S. and Europe have plainly identified the country as a key node of growth. There's a lot to like: a booming domestic market, technological smarts and Russia's coming accession to the WTO, all of which have made everyone from the oil majors to consumer-goods companies like PepsiCo ramp up their Russian ambitions. (Russia, along with Brazil, will benefit from the commodities run-up.)

    The most interesting sessions at Davos this year, however, were not about emerging markets but about the prospects for the Atlantic core of the developed world. With memories of the 2010 bailouts in Greece and Ireland still fresh — and the fear of more trouble to come in Portugal and Spain — top European policymakers arrived in Davos with a tough task ahead of them. They not only had to convince investors that the measures taken last year had stabilized the financial system; much more significantly, they had to give a sense that policy decisions made in 2011 would ensure that such crises did not happen again. Those policies — to enhance the Financial Stability Fund, to increase the surveillance of fiscal and budgetary decisions by euro-zone member states and generally to create a framework of "economic governance" in Europe without moving toward full-blown federalism — are both complex and contentious.

    That did not deter policymakers one bit. One after the other, European leaders went to the podium or spoke in private meetings with a single message: Europe escaped a meltdown last year by the skin of its teeth, and its leaders were now united in an effort to make sure that systems are put in place to reduce sovereign risk and enhance cooperation. Above all, the euro would be defended. Those savants on the other side of the Atlantic who had long predicted its demise could go choke on a fistful of dollars.

    With variations appropriate to each speaker's circumstances, that was the message from European Central Bank (ECB) president Jean-Claude Trichet (for my money, the true star of Davos this year); French President Nicolas Sarkozy and his Finance Minister, Christine Lagarde; German Chancellor Angela Merkel and her Finance Minister, Wolfgang Schäuble; and even British Prime Minister David Cameron and his Chancellor of the Exchequer, George Osborne. (One of the interesting side notes at Davos was how European both Cameron and Osborne sounded — none of the pandering to the euroskeptic wing of the Conservative Party in which they might be tempted to indulge at home.) The European choir was in such harmony that I assumed (as did others) that the score and parts had been agreed to in advance, though I was reliably informed that they had not been.

    Trichet and others reminded listeners what a success the euro had been, bringing price stability to the world's largest economy. But that goes only so far. Schäuble laconically pointed out that those who are not part of the European monetary system don't really understand how it works. And indeed, Europe's tangled decisionmaking in 2010, with matters bouncing around from national capitals to Brussels to the ECB in Frankfurt, is indeed hard to comprehend. (Though in a week when a federal judge in the U.S. ruled health care reform unconstitutional, American critics of Europe might recall the passage from the Sermon on the Mount about motes and beams.)

    So it fell to Sarkozy, with all the brio he brings to special occasions, to make the key point. In an impassioned defense of the euro, Sarkozy made an argument that few Americans fully understand. "The euro," Sarkozy said, in a passage worth quoting at length, "spells Europe , and Europe means 60 years of peace on our continent. We and the Germans fought three barbaric wars. If Europe has become the most peaceful continent, it is because we built the European Union. The single currency is a magnificent symbol of that. [The euro] is not an economic or monetary issue. It has to do with our identity as Europeans. We will be there whenever it needs to be defended." A day later Merkel made the same point, if without Sarkozy's passion. "The euro," she said, "is the embodiment of Europe. Should the euro fail, Europe will fail."

    For Europe in 2011, the key question is whether the public will always think that being "European" is worth some economic pain. Or to put it another way: Will those nations on the periphery of Europe and most at risk of a new or renewed sovereign-debt crisis sacrifice short-term economic prospects for the long-term benefit of remaining members in good standing of the euro zone? My guess — based on the Greek and Irish cases and the reform now under way in Spain — is that they will. But whether they can at the same time build economies that are creative and entrepreneurial enough to satisfy the aspirations of their young people is a different matter, one that will take more than a year to resolve.

    The question for the U.S. is the same. Secretary of the Treasury Timothy Geithner was in Davos, making the argument that the American recovery was on track and that President Obama's commitment to policies that encourage innovation was the key to future success. There are obvious risks, of course — notably, the U.S.'s deteriorating fiscal position, which the real doom merchants imagine will one day lead to a flight from the dollar — or the jacking up of interest rates when the economy is still too frail to cope with it.

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