Leaders of the world's seven richest countries and Russia were relatively sanguine when they discussed the state of the global economy at their summit in Genoa July 20-22. In a series of statements made on the first day, they insisted that the ground had been set for a solid upturn in economic growth in the fourth quarter of 2001.
In particular, they said they were convinced the U.S. had turned the corner and would provide a stimulus to the entire world. "We expect an improvement [in the U.S. economy] by the end of this year or the beginning of next," said Paolo Bonaiuti, a spokesman for Italian Prime Minister Silvio Berlusconi. "Since the U.S. economy is the global locomotive, that is good news for everyone."
German Chancellor Gerhard Schröder agreed. "It's now clear that there is no longer any reason to talk about the dangers of recession," he said. "We are heartened by [President] Bush's comments about the upturn in the U.S., which we think will give the eurozone economy a big boost."
But many economists weren't convinced. "They are trying to talk the markets up," says Adolf Rosenstock, an economist at Nomura International. "They can't afford to lose confidence at this stage." Economists and the financial markets certainly hope confidence will not collapse. But skepticism is mounting. And the heads of government themselves are nowhere near as optimistic as they initially made out.
Berlusconi, who hosted the meeting, admitted at the closing news conference: "We look at the forecasts and the situation is not exactly rosy. We should send out a forward-looking message and show we have the will to sustain and support the positive developments."
They can certainly try to do that. But the sad fact is that the reality is very different from the theory. Within 24 hours of the Genoa summit's closing there were renewed worries about the health of the German economy, by far the biggest in the eurozone.
GROWTH, BUT HOW MUCH?
Business confidence, as measured by a survey of 7,000 companies, plunged to its lowest level in almost five years. "This drop means that the economy hasn't found a bottom, and that it will take longer than expected until it regains ground," says IFO economist Gernot Nerb. The euro fell 0.5% against the dollar as soon as the figure was published.
Carlo Monticelli, co-head of eurozone economic research at Germany's Deutsche Bank, believes the upturn will be "far less robust than the G8 heads of government think." That's largely because the strong dollar will undermine U.S. exports and cause import inflation in the eurozone. The result will be sluggish demand in Europe (because of higher import prices) and sluggish demand in the U.S. (due to the economic slowdown there).
Meanwhile, the strong dollar is running contrary to what the U.S. needs right now, which is to boost its exports and bring its current account deficit down. "We have a situation where the U.S. is being hurt by the strong dollar at precisely the time in the economic cycle that it needs a weaker dollar to boost exports and stimulate growth," says Monticelli.
Yet no one has figured out a way to push the dollar gradually lower. The big fear is that it will continue to rise -- or experience a sudden and sharp correction. Either way, that's bad news for the U.S. economy, which means bad news for the global economy.
Despite everything, the world leaders who gathered in Genoa know it is the performance of the U.S. that increasingly matters. "It's the engine driving us forward," says one European official. "If the U.S. can't pull itself up by its bootstraps, there is little hope for the rest of us."
By David Fairlamb in New York
Edited by Beth Belton