TIME EUROPE
FEBRUARY 14, 2000 VOL. 155 NO. 6
Of Risks and Rewards
TIME's Board of Economists looks ahead to the potential opportunities, and pitfalls, that await regions across the globe at the dawn of a new century
By JAMES GRAFF Davos
Caution and verve rarely travel in tandem, but the six members of TIME's Board of Economists called for hefty measures of both last week as they looked ahead at a world economy that offers immense opportunities and unfathomable risks. Global megamergers, lofty stock valuations, the exponential growth of the Internet--it all adds up to a welter of wakeup calls for the world's investors, bankers, business leaders and workers. No one doubts that the future is volatile. The question is whether--and for whom--volatility translates into vulnerability.
The sheer urgency of change is inducing an unprecedented vigor in the U.S., Europe, much of Asia and pockets of the developing world. Some regions, like a Latin America buffeted by natural disasters, are up against forces they can perhaps parry but never control; others, like Japan, appear dangerously prone simply to hunker down or at best lumber forward at their own pace. Only the deft prevail in the new supercharged economy--and even the most nimble are ultimately at the mercy of American shareholders, who could wake up one morning soon and decide that the market is for the birds.
But Time's economists were unanimous in arguing that present pressures should not divert attention from future shocks: aging populations that can't expect adequate support in retirement from moribund social security systems. Embracing change means accepting risks, for not acting now is the riskiest strategy of all. That linkage is likely to become even clearer in the year to come.
Many companies are girding themselves for that volatile future in a way few countries can: by bulking up. The advent of the euro last year has set off a boom in cross-border megamergers in Europe, up by 87% from 1998 to '99 alone, according to Robert Hormats, vice chairman of Goldman Sachs International; last year more than 60% of all the world's mergers valued at $1 billion or more involved European companies. "We're likely to see more megamergers and more countries involved," he predicted, "because the Asians haven't gotten into the game yet, and they have to." Aiding the trend, Hormats argued, will be renewed progress in ironing out some of the differences in international accounting standards that have inhibited cross-border mergers (see separate story). Said he: "All over the world there is a real strengthening of the equity culture."
The fat fees that flow to the investment banks from those deals will continue to beef up their bottom lines. But all elements of the financial services sector--as is the case for every other intermediary in the economy, from auctioneers to arbitragers--would do well to remind themselves daily that their hallowed brands and broad service palettes will not inoculate them against the competitive challenges of the Internet.
Laura D'Andrea Tyson, dean of the Haas School of Business at the University of California at Berkeley and senior presidential economic adviser in the first Clinton administration, pointed out that big brokerage houses like Morgan Stanley Dean Witter and Merrill Lynch are finally launching their own online services against burgeoning upstarts like Charles Schwab and E*Trade--just as Internet-based brokers start broadening out to offer subscribers customized services, like interacting with financial advisers via Internet-based video. The losers? Maybe neither. "These new approaches aren't displacing anyone," said Tyson, "but allowing more of this to occur than could otherwise."
That's the idea, anyway--a new economy that adds value rather than supplanting it. It has worked in spades in the U.S., which last week marked its longest period of expansion in history, with unemployment figures most European countries can only envy. Hormats foresaw the boom continuing, predicting around 4% growth for the American economy in 2000. With deference to Tyson, he gave a share of the credit to the Clinton administration's drive to pare the U.S. budget deficit, which has succeeded beyond anyone's wildest fantasies. That fiscal policy has turned what government economists in the mid-'90s projected would be a deficit of $400 billion in fiscal 1999 into a whopping $120 billion surplus. Funds that elsewhere go to bankroll government debt are funneled into private investment in the U.S., and that money has only multiplied with the stock market boom. "The big impact of the wealth effect," said Hormats, "is that entrepreneurial investors are willing to take risks they won't take elsewhere."
Unfortunately, another effect of the consumption-led boom has been to raise U.S. private sector debt and the U.S. balance of payments deficit to alarming levels. Thus this virtuous circle could snap, if inflation concerns move Federal Reserve Chairman Alan Greenspan to jack up interest rates and thus spook an increasingly jittery stock market. Though investors took last week's short-term interest rate hike of .25% in stride, the pressure for a bigger boost remains strong. U.S. corporate and personal debt loads are at historic highs, so much of America's storied current wealth could evaporate with stunning speed. Despite big average increases in disposable income, pointed out Tyson, "savings rates are still declining, and no one knows what to do about that in any country."
Those problems could be further compounded if investors around the world decided that they are holding too many dollars. "There's been a substantial flow of willing capital from abroad, and the U.S. is dependent on that money," said Hormats. Inflation fears--or perceived better opportunities elsewhere--could "fuel a risk," he says, of foreign investors pulling out.
Those new opportunities could materialize in Europe, which is on track to offer the world economy more help this year than it has in recent times, said Horst Siebert, president of the Kiel Institute of World Economics. He predicted almost 3% growth for the E.U. economy owing to its favorable stage in the business cycle. But, worried Siebert, "The key question for Germany, France and Italy is whether they can get on a higher growth path." He contended that the Continent's major weakness is a comparative lack of private non-residential investment, which grew in Germany less than a quarter as fast as it did in the U.S. over the last five years. He argued that the proposed tax reforms of German Chancellor Gerhard Schröder, aimed at firms rather than individual entrepreneurs, would stimulate physical capital investments over the human capital that fuels new and supple start-ups. "If you want to reward entrepreneurial effort," said Siebert, "you should look to reforming personal income tax." MORE>>
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