Commentary: What They Should Be Talking About In Davos

The 2,000 business leaders, politicians, academics, and pundits descending on the tiny Swiss ski resort of Davos in late January have a serious agenda. For the annual meeting of the World Economic Forum, they have picked "Building the Network Society" as the main theme of the hundreds of panels and sessions in their six-day confab. In addition to the usual high-power networking, participants will mull over the new demands that information technology is putting on businesses, consumers, and regulators.

The Information Age is a worthy topic, but while the Davos set discusses the virtues of electronic mail in the rarified Alpine air, an economic avalanche is hanging over their heads. Widespread disinflation and extreme austerity in many countries have brought growth to a near standstill in much of the industrialized world. After breaking out of a three-year recession last year, Japan's economy is in dire shape again, and Europe's feeble expansion is hardly distinguishable from recession. Unemployment is steadily rising, and companies can no longer boost profits with price increases.

YAWNING DIVIDE. The situation could get even worse. As the European Union moves toward a single currency, countries will squeeze their budgets ever harder to meet the requirement for participation. Public spending--the traditional stimulus for growth--will go down, not up. In Japan, meanwhile, the government is raising taxes in a desperate attempt to narrow its budget deficit. And the U.S., whose growth and currency strength are buoying up the rest of the developed world, can't play the role of lifesaver forever. When the Davos conferees get back home, they should turn up the heat on government and business leaders in Europe and Japan to change their ways.

Deregulated economies such as Britain, Canada, and the U.S. have grappled amazingly well with disinflation and the other challenges of global competition. But Japan and Continental Europe are far behind. Germany's high costs and inflexible markets are so out of line with the new world order that they have already shaved half a percentage point off the country's potential growth rate, figures Union Bank of Switzerland economist George Magnus. In Japan, the Nikkei stock average's 16% fall since mid-November signals the yawning divide between the demands of the global economy and Japan's closed markets and pork-filled budgets.

For a glimpse of the real-life results of such failure to adapt, the Davos participants need look no further than outside their meeting halls. Switzerland's coddled economy has either been in recession or within a hair of it for five years. Unemployment is at 5%--outrageous by Swiss standards--and consumer spending has declined for three solid years.

For now, a rising dollar has provided a safety valve for Europe and Japan by making their exports more desirable on world markets. On Jan. 27, the greenback hit a 31-month high against the mark and a four-year high against the yen. But although it buys comfort and time for Europe and Japan, a stronger buck is no long-term solution to their problems. In fact, it could backfire by threatening growth in the U.S. The rising dollar has already sparked concern among U.S. manufacturers, which might have to lay off workers if American exports become too pricey.

NEEDED REFORM. Rather than counting on the dollar to bail them out, European and Japanese politicians should be pushing economic reform harder than ever. But their recent actions suggest they just don't get it. The French government keeps churning out plans for more high-speed trains--even though the national railroad is bankrupt. German Chancellor Helmut Kohl seems about to backpedal on badly needed tax reform, bowing to pressure from his counterparts elsewhere in Europe, who fear that if one country lowers taxes, others will have to follow. They say they can't afford to lose the revenues.

They can, of course--if they cut public entitlements out of their swollen budgets. As Britain learned, wringing the excesses out of government and industry takes time and causes pain. But it is reaping the rewards: low inflation, high productivity, and steady growth. Meanwhile, America's success in adapting to globalization is giving the laggards some breathing room. But the authoritative voices in Davos should sound an economic alarm to the rest of the industrialized world. Otherwise, the agenda for next year's meeting could be "Economic Damage Control."

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