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Crisis in confidence: The China
factor
By Francesco Sisci
BEIJING - The crisis in confidence in the
US economy triggered by the "creative accounting"
scandals involving Enron and others has highlighted
important differences in the world's two most powerful
economies, the United States and Europe. But another
emerging economic giant looms in Asia, and it is clear
that here, too, confidence is the key. Here, however,
security is the concern, and not so much misleading
profit-and-loss figures.
In the United States,
creative accounting permitted traditional companies to
show performances similar to those in the new high-tech
economy and thus compete with Microsoft and its peers
for a share of investment from an ever-greedier public.
In this way, one could see the Enron case and
the others as byproducts of the new economy. As the new
companies showed performances and potentials that were
crowding out the traditional companies, the latter lost
investment on the stock market. To compete and stay
afloat in a world of fast-shifting investment, the
traditional companies had to improve their performance.
To do that they had to streamline their business and
make it more rewarding for the stockholder, who would
otherwise shift his investment into new-economy stocks.
Furthermore, the new economy promised new
avenues of growth, promises fueled by the uncertainty
surrounding the real long-term effects of the computer
revolution. Although no one could calculate how much
efficiency would improve, everyone assumed such
improvements would show up on the balance sheets sooner
or later. The lack of clear calculations made the
atmosphere heady and investors got carried away, as
capitalists tend to do when they smell a period of
strong growth. But when streamlining and consolidation
failed to provide the numbers needed to lure greedy
investors, business leaders concocted new accounting
devices.
When the new-economy bubble burst,
overall enthusiasm waned and as the flood receded it not
only left the lesser new-economy companies stranded, but
it also revealed the faults of new-economy accounting.
The public felt cheated twice, once by the new economy
that had (partly, to be fair) failed to deliver as much
as it promised, and then a second time by Enron and its
companions that had misrepresented the numbers. The
sense of being cheated was compounded by Arthur
Andersen, an accounting company that was supposed to
check the numbers but instead covered them up; the
events of September 11 further shook confidence, because
they made the United States fear it could be attacked
and brought to its knees.
This is the essence of
the failure of confidence US Federal Reserve chairman
Alan Greenspan in his recent testimony to Congress spoke
about, and this is the reason for the failure of the
dollar vis-à-vis the euro. According to figures, the US
economy still outperforms the European economy at the
moment, but are these figures true? Investors asked that
question as they became more confident in the European
economy, which had little or no experience with the new
economy and creative accounting, and which had endured
terrorism for decades without any September 11-type
nervous breakdown.
In a sentence: the US economy
proved more volatile, for internal and external reasons,
while the European one proved more resilient.
That said, it is also true that the European
market lacks the US market's ability to face its ghosts,
be it the new economy, creative accounting or terrorism,
and to bounce back: its volatility is also vitality. No
failures in a technology-based economy or accounting
have occurred in Europe, yet no technological leaps have
taken place either. Despite the failures of new
accounting, America's fresh ways of doing business, when
not taken to the extreme, made it possible to see the
potential of new business and growth; and it forced
businesses to look for resources inside and outside the
company in order to reap this potential. Little of the
kind happened in Europe.
Moreover, when
confronted by external threats, such as terrorism or the
escalation of war in the Balkans, Europe as a cohesive
entity did little by itself; it either sent for US help,
or each European government acted on its own. Neither
actions served to support the regional currency, the
euro, designed to cover almost the whole continent. The
euro has no army or police to defend it and so, when
under attack, it must call Washington or the
headquarters of the governments of the former mark,
franc or lira. In such a scenario the euro would surely
plummet and the dollar rise again.
The lack of
European political unity is reflected in the lack of
continental companies. The European companies are German
or French or Italian and, if they do merge abroad, it is
often with US companies, a marriage less feared than one
with another, foreign European company. European
companies may expand from one country into another, but
they remain strongly based in a single nation. Labor and
tax policies, whose liberalization in the United States
made possible the new economy, in Europe are still in
the hands of individual governments that use them for
electoral purposes. No alternative is possible, as there
is no real continentally based democratic system. The
European Parliament is a house of super-lords with no
power if compared with their counterparts in the
national parliaments. Simply put: Europe is not a
country, and the United States is.
For this
reason, Europe has not managed to achieve large growth -
or the headaches that go with it. But domestic and
external threats are impossible to discount, and the US
is considerably better equipped to face both. So it
could turn out that what now looks like European
resilience may seem, in retrospect, to have been
European sluggishness.
All in all, the US seems
able to cope with its problems, albeit with some drama,
whereas Europe's reactions are much slower, and more
deliberate. Europe needs to get its act together, rather
than dwelling on short-term US difficulties. However, as
long as Europe remains obsessed with its own internal
problems, this is not likely to occur soon.
Indeed, many investors now put their money
neither into the volatile US or self-centered European.
They instead turn to China.
Next: The global security web
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