BUSINESS

Cracks in the G7 front

The Group of Seven faces growing tensions

PATRICIA CHISHOLM March 6 1989
BUSINESS

Cracks in the G7 front

The Group of Seven faces growing tensions

PATRICIA CHISHOLM March 6 1989

Cracks in the G7 front

BUSINESS

The Group of Seven faces growing tensions

It was a short-lived show of harmony. After the seven leading industrial nations convened in Washington early in February, their economic representatives carefully presented a united front of agreement. World economies were surprisingly strong, they said, and huge trade imbalances would continue to ease without drastic measures. But now, cracks have begun to appear, especially between the United States and other members of the so-called Group of Seven (G7). Skeptics among the group have been expressing concern that President George Bush’s first budget, presented on Feb. 9, will not significantly reduce the country’s $ 170-billion annual budget deficit. Bush will have to take a stronger position on the deficit if the group’s next meeting, scheduled for Washington in April, is to be as smooth as February’s, some G7 members said last week. Added economics professor Jeffrey Frankel of Harvard University: “U.S. policymakers are forced to listen more politely and pay attention because we are a debtor country now and have to listen.”

Some economists say that the deficit does not pose an economic threat and must be cast against other large economic issues. But a failure of co-operation among the group— made up of the United States, Japan, Britain, West Germany, France, Italy and Canada—to agree on the deficit could threaten the stability of world economies. Agreements among the seven help to sustain currencies at agreed levels, moderate interest rates and resolve

trading disputes. But some economists say that the power of the G7 to balance the competing domestic demands of its members could be reaching its limits.

The U.S. position on deficit financing has sparked controversy among members of the group for years. The Americans’ federal budget deficit is inflationary, other group members say. As well, the U.S. trade deficit remains stubbornly high, despite a 50-per-cent devaluation of the greenback since 1985—a strategy taken by the group to help make U.S. exports more attractive. Said Michael Miller, director of research with the economic forecaster The WEFA Group in Toronto: “The G7 have done a great deal since 1985, but what is left? We see the trade imbalance as an intractable problem.”

Some Americans, however, say that G7 concerns about the deficit ignore the economic expansion that it creates. Paul Craig Roberts, fellow with the Washington-based Center for Strategic and International Studies, said that the American deficit has been used as a political excuse to lecture the United States. Said Roberts: “If other members of the Group of Seven are going to run an export-based growth policy, they can’t complain about our deficit.”

The critical issue, most economists say, is whether individual members of the group can be persuaded to undertake measures that they have resisted in the past. For countries with trade surpluses, including Japan and West Germany, that would involve opening their econo-

mies to imports from countries that have trade deficits—particularly the United States. To help right the imbalance, the United States has demanded that Japan and West Germany stimulate their economies, creating a greater demand for American exports.

Both those countries have taken some steps in that direction, but they are reluctant to go further because they fear causing inflation and weakened currencies. Said Frankel: “Germany would go into shock at the thought of losing one-third of its trade surplus.” Japan, by contrast, is more resigned to the necessity of reducing its

trade surplus, currently at $65 billion.

But those countries also insist that the United States has not fulfilled its part of the bargain. The Americans have shown little inclination to face the hardships associated with deficit reduction—less spending and higher taxes. The Bush budget has been widely criticized as an unrealistic attempt to reduce government debt without alienating voters. Said Robert Boaz, chief economist at Deacon Morgan McEwen Easson Ltd. in Toronto: “The American deficit could actually go up in 1989 because the budget assumes strong growth and low inflation.” Instead, Boaz said, most economists are

predicting slower growth in the coming year, together with a hike in interest rates. Higher rates would add to the cost of servicing the deficit. Said Boaz: “Bush’s deficit-reduction plan is therefore losing credibility.”

In other countries, anger toward the United States’ failure to cut spending is clearly growing. Said John Williamson, senior fellow at the Washington-based Institute for International Economics: “There is a very clear perception by countries other than the U.S. that it is not doing enough to cut the deficit.” Further devaluations in the dollar will not work, he said, because American industries are already operating at capacity. They would not be able to satisfy greater demand for American exports.

And although some analysts argue that the deficit is not inflationary, the Americans are under pressure to raise taxes to cut the deficit. Said Williamson: “G7 countries are angry with Bush’s insistence that taxes won’t go up.”

Officials from other G7 countries have also expressed concern about the unexpectedly strong growth of their economies. Strong growth can lead to inflation, a possibility that particularly alarms West German Chancellor Helmut Kohl.

Although the German rate of inflation is forecast at only 2.5 per cent this year, up from

I. 6 per cent in December, the Bundesbank— Germany’s central bank—has raised interest rates by a full percentage point since last fall. Said Lloyd Atkinson, chief economist at the Bank of Montreal: “The Germans err on the side of restraint, but it is only a matter of time before the Japanese raise their rates too.”

Rate increases around the world could stall American attempts to reduce the deficit by slowing growth and raising debt-servicing costs. Last week, the threat of higher rates in North America grew when the United States announced a higher-than-expected 0.6-percent increase in consumer prices for January. Federal Reserve Board chairman Alan Greenspan said that the increase was “disturbing,” a signal that American interest rates may rise to counter the trend. And in Canada, Bank of Canada governor John Crow has backed up promises to keep inflation under control by pushing the bank rate to a three-year high of

II. 86 per cent.

Still, some G7 members said last week that concerns over rate hikes have been exaggerated. Helmut Henschel of the Westdeutsche Landesbank in Düsseldorf, for one, played down the current interest-rate spiral. Said Henschel: “We get the strong impression that the central banks have decided to sit tight for a while to see if their recent monetary squeezes are going to work.” Clearly, the Group of Seven members face growing tensions unless they can resolve their competing domestic concerns. Failure to do so could throw the world economy into a period of instability that none of them would welcome.

PATRICIA CHISHOLM

PETER LEWIS

WILLIAM LOWTHER

in Washington