The Sky's The Limit

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Those problems could be further compounded if investors decide they are holding too many U.S. dollars, a risk that grows with the current account deficit. Right now the difference is made up by foreign investment funds flowing into the U.S. "The U.S. is dependent on that money," said Hormats. Inflation fears--or perceived better opportunities elsewhere--could "fuel a risk," he added, of foreign investors pulling out.

Those alternative investment opportunities could materialize in Europe, which is on track to offer the world economy more help than in recent times. Horst Siebert, president of Germany's Kiel Institute of World Economics, predicted "roughly 3%" growth for the economy of the 15-nation European Union this year. But Siebert was worried that "the key question for Germany, France and Italy is whether they can get on a higher growth path" to shrink their high levels of unemployment. The Continent's major weakness, he said, was a comparative lack of private investment, which grew in Germany at one-quarter the U.S. rate over the past five years. A huge German corporate tax cut proposed by Chancellor Gerhard Schroder would make a big difference, but if Europe's most powerful economy wanted to imitate the entrepreneurial culture of the U.S., he said, "you should look to reforming personal income tax."

Nor is that the only human-resource problem Siebert saw on Europe's horizon. The most ominous is an aging population that for retirement will rely heavily on the unsustainable equivalent of Social Security--and, in Germany particularly, a higher-education system that ties down students for too long and doesn't prepare them sufficiently for a competitive economy. "Flexibility is still a taboo word in France," warned Siebert.

Other board members were more optimistic. "Europe is at the beginning of a renaissance," predicted Kenneth Courtis, the Tokyo-based vice chairman of Goldman Sachs Asia. "The euro is creating a competitive marketplace almost as big as the U.S.--and in effect outside the control of any government." In addition, the weak euro--down from a value of $1.17 at its birth a year ago to less than $1 now--has been a boon to European exporters. On the other hand, Hormats was worried that the euro's slide has taken some of the pressure off structural reform.

Still, by any measure, the prospects for adjustment in Europe are better than those in Japan, which is trapped, as Courtis put it, "in a vise of demographics, deflation and debt." In 1991, he observed, Japanese government debt amounted to 51% of the GNP. In 2001, he warned, the government debt could reach 151% of GNP. Bank loans amount to 145% of GNP. Courtis warned against taking too much solace from last year's anemic 1% Japanese growth rate, which was caused by massive spending and worsened an already dismal fiscal picture. "The Japan of today makes the Italy of yesterday look like a paragon of fiscal rectitude," said Courtis. "The country has to engage in a reform agenda of a magnitude we've rarely seen in a modern country."

Courtis was concerned that overall Japanese corporate investment in high tech is falling sharply behind that in the U.S. The country's consumer spending is still trending sharply down, and demographic forces are already starting to bite. In 1998, Courtis pointed out, more Japanese retirees withdrew funds from the pension system than there were workers contributing to it. "It would be really unwise to underestimate the level of political turmoil possible as Japan reforms," he warned.

The only way out, according to Courtis, may well be for the Bank of Japan to print more money. That approach to dealing with the debt load, he said, would cause a torrent of wealth to leave Japan and push international stock markets higher (or at least put a floor under their decline). But it would also mean a lower yen and thus more attractive Japanese exports. Though other economies might be leery of that, Courtis suggested they should prefer a low yen to a deeply indebted Japan. "You can't have it both ways," he said.

While Japan is still in trouble, the rest of Asia "has come out of the bottom of the valley," claimed Victor Fung, chairman of the Hong Kong Trade Development Council. Export growth is so strong, in fact, that Fung was concerned that "we may have come out of recession too early to get fundamental reforms." The region remains enthralled by a familiar theme: the emergence of China. Its entry into the World Trade Organization later this year, said Fung, "signifies China's taking its full place in the world." The prospects for growth are immense. Fung noted, for instance, that services currently make up only 30% of the Chinese economy, as against 85% in Hong Kong. The Internet revolution is a clear avenue for change: 80 million Chinese already have cable access, and the number of Internet users is doubling every six months. The other economies of the region are also on the rebound.