ABSTRACT
The growth differential between Europe and the United States (US) is narrowing, but not because Europe is picking up. A widening trade deficit is the major factor behind a projected US slowdown to under 3 percent growth this year. Strong US economic growth and the high dollar led to a large merchandise trade deficit, whose mirror image is strong foreign capital inflows. Domestic capital formation has not been crowded out, since the foreign source of funds has increased so dramatically. The prolonged large US trade deficit brings its own set of risk factors. The declining interest rate profile for 1985 and 1986 reduces the risk of a Latin American default. Uncertainty on rescheduling plans now runs high for Brazil and, to a certain extent, Argentina. The slackening activity is initiated by slower US growth and compounded by deterioration in Europe's competitive position because of the already visible decline in the dollar.
