The experience of Europe has been special, inasmuch as it had to face up to two compelling circumstances during these years: German unification and preparations for monetary union. This compelled government to hold expenditures firm. Since 1993 the fiscal deficit in EU has fallen continuously from 6 per cent of GDP to touch 1.1 per cent in 1999. Part of the reason was the need to keep the current account deficit from rising beyond a level that violated the conditions set for the realisation of monetary union. However, this involved a cost. Fluctuations in the fiscal deficit below the self-imposed ceiling obviously proved inadequate to prevent the steep and consistent rise in unemployment that the region has been witnessing.
 
As compared with the EU, Japan was not constrained by its current account at all, having notched up huge surpluses right through the 1990s. It was this factor that allowed Japan the freedom to experiment with periodic bouts of fiscal pump-priming, which took its fiscal deficit from 1.5 per cent of GDP in 1992 to 5.9 per cent in 1999. If despite this the strong recovery of 1996 in Japan was aborted, the reason lies in the currency crisis in East Asia and the inability of Japan to help moderate its consequences for output and trade growth in the region. Being far more dependent on East Asian markets than the US or Germany, the impact of the crisis on Japan has been sharp enough to stall the recovery the Japanese government had managed to engineer in 1996.
 
The Asian crisis did not matter as much to the US, since the transformation of the budget deficit into a surplus has been accompanied by a sharp rise in consumption expenditure. Given the large direct and indirect (through pension funds, for example) investments of personal savings in equity in the US, the stock market boom enhanced the wealth of American citizens, reducing incentives to save. The net result has been a sharp increase in private consumption expenditure and a collapse of private savings in the US. Personal savings as a percentage of disposable personal income in the US fell from 1.2 per cent in 1997 to 0.5 per cent in 1998, turned negative in the first quarter of 1999 and touched a remarkably high negative level of 1.3 per cent in the second quarter ending June 1999.
 
Most observers trace this low rate of savings, to the fact that the rising value of their financial assets, encouraged households to save less and borrow more, since they were convinced that the value of their past savings was more than adequate to finance their future requirements. Thus the role of financial asset inflation in sustaining high consumption was crucial. In 1997, household equity holdings were 143 per cent of disposable income in the US, up from an average of around 50 per cent in the early 1980s. It should be obvious that, in time, the consumption-led boom in the US would spill over into the world economy. That this has been occurring is clear from trends in the deficit in the trade in goods and services on the US balance of payments. That deficit has risen more than seven-fold from $37 billion in 1992 to $267.6 billion in 1999 (Chart 7). This magnitude of increase in the trade deficit accounts for almost 80 per cent of the increase in the current account deficit in the US balance of payments from $50.6 billion to $338.9 billion (Chart 8) during this period. This rising deficit did not matter for long, since capital inflows more than neutralised the effects such a deficit can have on the value of the dollar. Not only did money flow into US equity, but outstanding amounts of international debt securities originating in the US rose sharply to $946 billion at the end of the first quarter of 1999.
Chart 7 >> Chart 8 >>
 
Unfortunately, the burgeoning deficit, which necessitates capital flows in the first place, could undermine confidence in the dollar. To boot, the recent speculative rush into US stock markets, led by unwarranted optimism regarding the future of "high technology" companies and their stocks, is now losing momentum. These developments have two implications. First there is a real danger that the one-way flow of money, which helped America flourish while other advanced nations languished or grew slowly would come to an end. This could aggravate the fall in stock markets currently led by disillusionment with hi-tech stocks. Second, the consumption boom led by the wealth effect could collapse. As the market decline wipes out illusory wealth, there could be an abrupt adjustment in the household savings rate from its current historic low which could massively squeeze consumption demand. This would mean that the only source of stimulus in the global economy today could be dampened, turning a process of slow growth into recession. The era of high growth and large current account deficits could come to an end. That prognosis is now a real possibility, though developed country governments and the international financial institutions are pinning their hope on a "soft-landing" in the US. Whatever the actual outcome, there is a strong possibility that the world may witness a return to an era of synchronised sluggishness or recession at its developed core. The confidence exuded at the top could thus be misleading complacence.