The paradox is that just as the euro becomes more acceptable outside of euroland, it is the source of serious grumbling at home. The "high" euro, and the European Central Bank's stated intention of preventing inflation from eroding its value, is hurting exporters, and making imports from China--which has relaxed the yuan's peg to the dollar only a little--cheaper still. Italians blame domestic inflation on the euro, and pine for the return of their lire, showing just how fallible memories can be. And Nikolas Sarkozy, appalled by what he believes to be an over-valued euro, is leading a battle to give politicians a say in determining interest and exchange rates.
We know two other things. The first is that the U.S. economy will indeed slow, at least in the first half of 2008, as the credit crunch--as it is oddly called given that banks are awash in cash--unwinds. The second is that whichever one of the Democratic contenders ends up in the White House, he or she will be pledged to please not only the trade unions but a broad swathe of voter opinion by retreating from the nation's historic position in favor of free trade. Doha, if not already dead, will breathe its last, and be buried. The new president will not sign on to any new trade deals. The free flow of goods will be inhibited by increasingly protectionist measures, the free flow of capital will be threatened by increasing scrutiny of the non-transparent sovereign wealth funds, and the free flow of labor made less free by more stringent border controls. Free trade, R.I.P.
These are all small things, compared to the really big thing that we know. The American economy is an amazingly resilient and flexible machine. Remember the dot-com bust, which is cited as the model for what we are about to go through? Since that dreary period the U.S. economy has added eight million jobs. In real, inflation-adjusted terms, the value of the goods and services produced in America is about 15 percent higher than it was during the dot-com bust. And even after the precipitous drops of recent days, the leading share-price indexes are healthily up over dot-com bust levels.
If you need any further proof of the ability of the U.S. economy to survive and thrive after taking a blow, consider the speed with which output, employment, and every other indicator rose soon after the devastating attack on September 11. Or after hurricane Katrina. Or ask yourselves whether you can identify the enduring impact of these events during the Clinton years, now remembered, and not only by Hillary Clinton, as a golden age: the Mexican peso crisis, the Asian financial crisis, and what scholars now call "the crisis of confidence and legitimacy of the international monetary and financial system."
It is now fashionable to call the year just ended a year of two halves--a prosperous first half, followed by a sub-prime infected second six months. This year might just prove to be the reverse: a stormy first half, followed by gradual brightening as America's entrepreneurs find new fields to conquer.
Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).