Washington, April 14 (Bloomberg) -- The twin U.S. budget and trade deficits that European finance ministers criticize for weakening the dollar by 18 percent in the past year may instead be the world's best bet for swifter economic growth. ``The U.S. is the locomotive of global growth,'' said Bernard Streit, chief executive officer of French auto-parts maker HBS Technologie SA. ``If it takes a lower dollar to get the train running again, that's what we need.'' European Central Bank President Wim Duisenberg, German Finance Minister Hans Eichel and other finance officials urged U.S. Treasury Secretary John Snow to reduce America's twin deficits. Duisenberg, Eichel and Snow met with their counterparts from France, the U.K., Canada, Italy and Japan at the Group of Seven meeting in Washington two days ago.
The U.S. trade deficit, the negative balance that occurs when the nation's imports exceeds its exports, was $40.3 billion in February, the third-highest deficit ever. The government's federal budget deficit, the result when government spending exceeds revenue, reached $158 billion in fiscal 2002 following four years of surpluses. The White House projects budget deficits through 2007. The estimate doesn't include the cost of war and reconstruction in Iraq. Duisenberg and Eichel are concerned that the twin U.S. deficits will speed the decline of the dollar and hurt economic growth. Their worries may overlook potential advantages. Companies such as HBS have benefited as their U.S. customers raised orders, their own sales bolstered by a weaker dollar.
Boosting Demand
The U.S., the world's largest economy, is Europe's largest foreign investor and buys about a quarter of Japanese exports. A weaker dollar may pave the way for lower interest rates in Europe, Goldman Sachs Group Inc. Senior European Economist Nicolas Sobczak said. ``Europeans get very worked up about losing export revenue with a stronger euro,'' Sobczak said. ``But boosting demand in the U.S. is the only way out of the slump.'' The economy of the G-7 countries, which accounts for about two-thirds of world's gross domestic product, expanded 1.3 percent last year and 0.6 percent in 2001, the worst two-year showing since the mid-1970s. The International Monetary Fund last week pared its forecast for global growth to 3.2 percent from 3.7 percent. The ECB's Duisenberg and Finance Minister Nikos Christodoulakis of Greece, which holds the European Union's rotating presidency, said they confronted U.S. officials with their concern about the twin deficits and were backed up by Horst Koehler, director of the IMF.
`Serious Imbalances'
``The reappearance of serious imbalances in the public sector may eventually affect, and even undermine, the confidence of consumers and investors,'' Duisenberg said. Bundesbank President Ernst Welteke said risks of twin deficits ``are not inconsiderable,'' while Eichel called them ``cause for concern.'' Rising twin deficits could at some point push interest rates higher as the government has to pay more to finance its debt, according to a theory held by former President Clinton's Treasury Secretary Robert Rubin and more recently by Federal Reserve Chairman Alan Greenspan. The increases could divert funds from private investments, hurting productivity. As a result, the dollar's decline may accelerate and leave the U.S. short of the $1.5 billion of foreign capital it needs daily to offset its current-account gap.
Benefits Too
The point that some economists say the ministers are missing is that higher government spending and a weaker dollar both boost demand in the U.S., which helps order books in other regions. ``Manufacturers are benefiting from the lower dollar with orders coming back and more gains likely later in the year as the effect of the weaker currency takes hold,'' said Frank Vargo, vice president for international economic affairs at the National Association of Manufacturers. The dollar weakened 0.2 percent last week to $1.0752 per euro, leaving it down 2.5 percent this year. It is poised to decline for a second week in three, according to a Bloomberg News survey of 37 traders, investors and analysts. At the same time, government spending has been one of the main driving forces behind U.S. growth in recent quarters. Last year, state outlays accounted for 0.8 percentage point of the overall growth rate of 2.4 percent. ``The world should thank America for acting as the spender of last resort,'' said Vincent Koen, an economist at the Organization for Economic Cooperation and Development in Paris.
More Spending, Higher Growth
Every time the U.S. administration raises spending by 1 percent, expansion in the dozen countries that share the euro jumps by 0.4 percent, according to the OECD. Growth in Japan, the world's second-biggest economy, receives a 0.5 percent boost. A falling dollar may also increase world growth by giving the ECB room to lower interest rates as a stronger euro cheapens imports and reduces inflation. Price growth in the region has been stuck above the banks' 2 percent ceiling for the best part of three years. Even as the economy slowed to its weakest pace in nine years last year, inflation came in at an average of 2.2 percent. The ECB shaved a quarter point off its benchmark refinancing rate on March 6, leaving it at a 3 1/2 year-low of 2.5 percent. Economists say the cut was too late and too timid. ``The ECB should have cut earlier in 2002 and by a half point in March,'' said Goldman Sachs's Sobczak. ``Rates need to fall to 2 percent.'' Without the euro's rise against the dollar last year, inflation would have risen to 2.5 percent, Sobczak estimates, and may have stopped the bank from reducing borrowing costs at all last month. Goldman Sachs predicts the euro is headed for $1.15 in coming months from about $1.08 now. At that rate, the euro's strength would trim inflation to 1.5 percent and create ample room for further rate cuts, he said.
IMF Forecast
The IMF cut its forecast for growth in the euro economy by half last week. The fund now predicts expansion of 1.1 percent, scrapping September's forecast of 2.3 percent. A half point reduction in borrowing costs would also raise economic growth by about half a point, according to the OECD. ``If the ECB cuts rates by 50 basis points, I gain 100,000 euros a year,'' said Guy Manou-Mani, chief executive officer of French computer services company Groupe Open SA. The company's debt is mainly short-term and financing costs of amount to about 2 million euros ($2.2 million) a year. With public finances coming increasingly under strain from overburdened pension systems and rising medical costs, the U.S. public deficit is a cause for concern in the long-term, economists say. Right now, however, the task is to boost growth in the short- term and there the U.S. plays a key role. ``I've never understood the criticism,'' Treasury Undersecretary John Taylor said. ``More growth in the United States spills over and is positive for the rest of the world.''//www.bloomberg.com