America's Economy Owned the 90s and Flunked the Millennium". Attention has shifted to Europe where productivity and investment are soaring. China remains the world's most buoyant economy but Japan, too, is growing at a fair clip, catching up after a decade of stagnation Of course these scenarios are flights of economic fancy but they make two serious points First, the world's reliance on America as its only engine is increasingly risky. Second, moving away from a one-engined world will not be painless. In America, in particular, the economy is likely to remain weak for the next few years. That may sound depressing but sluggish growth for another half-decade is much better than a dollar crash a deep recession or a stampede into protectionism a sudden dollar crash precipitated by a big shock in America's financial markets may not be likely but it is certainly possible. The longer that America's current-account deficit -and hence into recession. Spiking interest rates would deflate American consumer spending. A soar2g its reliance on foreign capital-continues to grow the greater the risk that a shock to America's financial markets will send the dollar crashing. This would probably push the world economy euro would darken Europe s economic outlook. If the euro rose far and fast enough it might even put European monetary union at risk. And poor countries would be hit by a double whammy: a sharp drop in export earnings as the rich world plunged into recession and a sharp rise in interest rates as investors abandoned risky assets Protect us from protectionism But a dollar crash and global recession are not the only gloomy possibilities. Equally worrying and much more likely is a surge in protectionism especially if America' s current-account deficit continues to rise rapidly. In 1985, Congress seriously considered an import surcharge of the sort described in the imaginary scenario above. Many American politicians are already ambivalent towards the Wto. If the government loses a few more big trade cases, that ambivalence could turn to antipathy a slide into protectionism would have grave consequences. since the end of the second world war, America has championed the multilateral approach to freeing global trade though witl varying enthusiasm. If it were to give up this leadership role even temporarily, the global trading system would be in deep trouble. The WTo is a fragile organisation, less than ten years old. It would not survive a lengthy period of American disengagement. The intellectual consensus in favour of free trade particularly in poor countries, could also wither in the face of American protectionism. Poor countries would ask why if it was fine for America to raise barriers against the Chinese threat they should hold back from doing the same. Given that trade integration plays a crucial role in economic development the worlds poorest would find it that much harder to escape from poverty. The most important message, however, comes from the third and most optimistic scenario. It that the best outcome the world economy can hope for in the next few years is a fairly sluggish performance by America' s economy, combined with faster growth elsewhere. A few more years of below-average growth but no serious recession would help america to work off its excessive debt and increase its savings rate. The best-case scenario would be for both Europe and east Asia simultaneously to pick up the slack. That would allow the dollar to decline gradually rather than crash; but with relatively slower growth at home and faster growth abroad, America'sAmerica's Economy Owned the '90s and Flunked the Millennium”. Attention has shifted to Europe, where productivity and investment are soaring. China remains the world's most buoyant economy, but Japan, too, is growing at a fair clip, catching up after a decade of stagnation. Of course these scenarios are flights of economic fancy, but they make two serious points. First, the world's reliance on America as its only engine is increasingly risky. Second, moving away from a one-engined world will not be painless. In America, in particular, the economy is likely to remain weak for the next few years. That may sound depressing, but sluggish growth for another half-decade is much better than a dollar crash, a deep recession or a stampede into protectionism. A sudden dollar crash precipitated by a big shock in America's financial markets may not be likely, but it is certainly possible. The longer that America's current-account deficit—and hence its reliance on foreign capital—continues to grow, the greater the risk that a shock to America's financial markets will send the dollar crashing. This would probably push the world economy into recession. Spiking interest rates would deflate American consumer spending. A soaring euro would darken Europe's economic outlook. If the euro rose far and fast enough, it might even put European monetary union at risk. And poor countries would be hit by a double whammy: a sharp drop in export earnings as the rich world plunged into recession, and a sharp rise in interest rates as investors abandoned risky assets. Protect us from protectionism But a dollar crash and global recession are not the only gloomy possibilities. Equally worrying, and much more likely, is a surge in protectionism, especially if America's current-account deficit continues to rise rapidly. In 1985, Congress seriously considered an import surcharge of the sort described in the imaginary scenario above. Many American politicians are already ambivalent towards the WTO. If the government loses a few more big trade cases, that ambivalence could turn to antipathy. A slide into protectionism would have grave consequences. Since the end of the second world war, America has championed the multilateral approach to freeing global trade, though with varying enthusiasm. If it were to give up this leadership role, even temporarily, the global trading system would be in deep trouble. The WTO is a fragile organisation, less than ten years old. It would not survive a lengthy period of American disengagement. The intellectual consensus in favour of free trade, particularly in poor countries, could also wither in the face of American protectionism. Poor countries would ask why, if it was fine for America to raise barriers against the Chinese threat, they should hold back from doing the same. Given that trade integration plays a crucial role in economic development, the world's poorest would find it that much harder to escape from poverty. The most important message, however, comes from the third and most optimistic scenario. It is that the best outcome the world economy can hope for in the next few years is a fairly sluggish performance by America's economy, combined with faster growth elsewhere. A few more years of below-average growth but no serious recession would help America to work off its excessive debt and increase its savings rate. The best-case scenario would be for both Europe and East Asia simultaneously to pick up the slack. That would allow the dollar to decline gradually rather than crash; but with relatively slower growth at home and faster growth abroad, America's