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Davos prepares for talks on thin ice

As political and business leaders prepare for this week's annual meeting of the World Economic Forum in the Swiss ski resort of Davos, there is a feeling of relief - even of spring-like optimism - in the air.
/ Source: Financial Times

As political and business leaders prepare for this week's annual meeting of the World Economic Forum in the Swiss ski resort of Davos, there is a feeling of relief - even of spring-like optimism - in the air. 

Robust economic recovery in the US and Asia, the capture of Saddam Hussein, peace overtures between India and Pakistan and Libya's abandonment of weapons of mass destruction have all raised hopes that clouds over the global outlook are lifting. 

Yet beneath the surface, the mood is fragile. Many participants are concerned over whether US growth is sustainable and by the persistence of rifts between the US and its allies over the Iraq war. They are nervous that further nasty surprises may lie round the corner. 

Klaus Schwab, the forum's president and founder, says: "People are confident yet ill at ease. They feel they are walking on very thin ice and that unforeseen political or economic events could easily upset things." 

One of the main talking points at the five-day meeting, which starts on Wednesday, is expected to be the risk of a further sharp fall in the dollar leading to a steep rise in US interest rates, reversing the recent economic rebound. That prospect particularly worries European business leaders. 

Peter Sutherland, chairman of BP and Goldman Sachs International, says: "There is a much more confident air in US industry. But Europeans have to be convinced that it is not just short-term." 

Many Europeans fret over what they consider the fiscal profligacy of President George W. Bush's administration and its complacent attitude towards the gaping US current account deficit. One talks dismissively of "a bunch of jaunty Texans with an insouciant approach to economic policy". 

Transatlantic relations will also be tested by US foreign policy, especially over Iraq. The issue provoked such bitter recriminations last year that some US participants threatened never to return to Davos. 

This time, there are cautious hopes of a healing process. The decision by Dick Cheney, the normally reclusive US vice-president, to attend has been greeted as a signal that Washington wants to mend fences. 

The quest for reconciliation will be reinforced by the relaunch in Davos of the Transatlantic Business Dialogue, a government-backed forum set up to tackle economic and trade frictions between the US and Europe. 

However, the presence of Mr. Cheney and of John Ashcroft, US attorney-general, will also be a reminder of another source of unease - the growing economic cost of stricter border security measures to combat terrorism. 

Ken Rogoff, former chief economist at the International Monetary Fund, who will be in Davos, says: "If anti-terrorism measures were stepped up sharply, the effect on global growth would be staggering. It could send globalization into retreat." Jeffrey Garten, dean of Yale management school, believes globalization also faces the challenge of dwindling faith among supporters rather than from antagonism by opponents - who have been banned from demonstrating in Davos. 

He says even globalization's fervent advocates, many of them forum regulars, have grown less convinced of its power and inexorability. "It is almost as if globalization has moved into neutral gear." 

One reason is that confidence in capitalism and markets has been dented by a rash of corporate scandals. Chief executives, lionized at Davos during the 1990s as masters of the new global order, are now struggling to regain poise and public respect. 

Niall FitzGerald, chairman of Unilever, says: "We have an enormous amount to do to rebuild trust in business leaders." He fears that, unless companies do more to put their house in order, they will face increasingly rigid and intrusive regulation by governments. 

The mood of boardroom contrition sits oddly with the organisers' ambitions to assign business leaders a central role in "partnering for security and prosperity", the headline theme of this year's program. 

However, many of the 2,100 participants regard the official program as a sideshow, preferring to spend their time in business meetings and taking the temperature of international opinion in private gatherings. 

Mr. Garten says: "The value of Davos is as a barometer. You never leave saying you learned something. You can only say, 'I am leaving a little more optimistic or pessimistic than when I arrived'."