The Duke of York and Albany built London’s sumptuous Lancaster House, the setting for this week’s economic summit, in the 1820s, but he died before paying for it or moving in, and his creditors took it over. Fittingly, the world’s creditors, the seven major industrial nations, are meeting in the historic building more than a century later to grapple with their own much more severe problems with cash-starved debtors and the cost of money. And, although they are expected to end their session with joint declarations on how to deal with major threats to the world economy, from high interest rates to trade protectionism and Third World debt, their public satisfaction will hide disagreements that will be aired in rooms where Chopin once played for Queen Victoria.
The heads of state of the United States, Britain, West Germany, France, Italy, Japan and Canada are meeting for their 10th annual parley since 1975, at a time when the global economy is being buffeted by rising U.S. interest rates, threats of a broadening war in the Persian Gulf, rumors of major bank collapses and the growing calls of Third World countries for a new deal on debt repayments. But there is little chance
that their discussions will produce agreements on how to solve those dilemmas. Reagan administration officials entered the summit insisting that the United States is indeed leading the world out of recession and should not be blamed for its economic difficulties. U.S. budget deficits, said U.S. Treasury Secretary Donald Regan, “are not the
Bitter transatlantic disagreements will be aired in rooms where Chopin once played for Queen Victoria
only cause of the world’s problems.” But Washington’s summit partners are much less sanguine. They view rising interest rates as a very urgent threat to their own fragile recoveries and to the welfare of the developing world. The debt crisis, declared French Finance Minister Jacques Delors, “hangs like a sword of Damocles” over the industrial world, and his office predicted that the issue would create tension in London between the Europeans and Washington.
Prime Minister Trudeau, attending
his last international gathering before retiring from politics, shares the Europeans’ concern about high interest rates, but he also welcomes the strong U.S. recovery. British Prime Minister Margaret Thatcher is expected to take a similar position. Still, even if their efforts ease the transatlantic strains, the summit is unlikely to produce specific proposals for dealing with the problems. Indeed, the annual summits, which began with an informal private gathering in Rambouillet, France, in 1975, have gradually deteriorated into media events with more public posturing than substance. More than 3,500 journalists and 1,000 officials converged on the London gathering, where security precautions included the equipping of some of the 440 traditionally unarmed British bobbies with Heckler and Koch submachine-guns.
The European leaders arrived at the meeting with a litany of complaints directed against Washington. Surging U.S. interest rates and the strengthening dollar—it has increased about 50 per cent since 1980 against an average of 10 major currencies—increase the cost of Europe’s oil imports, which are valued in dollars, draw its investment capital to the United States to take advantage of higher returns, make the Continent’s weak recovery more difficult to sustain
and devastate Third World countries caught in a debt squeeze. As the former president of the West German Bundesbank, Otmar Emminger, put it recently,“It is a high-risk situation.” For her part, Thatcher, as host of the summit and an admirer of Reagan’s laissez-faire policies will try to prevent any concerted public attacks on the Americans.
In turn, the Americans contend that they are already doing more than their share to aid the Western recovery in the middle of an election year. As a result, they are not likely to provide any assurances of a shift in policy. A source close to the Reagan adminstration told Maclean’s that “No one is going to persuade the president to increase taxes or anything like that. Remember, it is an election year.” Indeed, some U.S. authorities believe that Washington is paying a heavy price, including an estimated ISObillion 1984 balance of payments deficit, for leading the recovery. The Americans also maintain that Western Europe is benefiting from the sharp increase in imports by the United States, made possible by the strong dollar. They note that if the trend of the first three months of 1984 continues, the United States will run a $15-billion trade deficit with Western Europe this year.
What is more, U.S. economists are not prepared to tolerate criticism from their country’s trade partners. Said Edward Hudgins, an economist with the Washington-based Heritage Foundation, a conservative think-tank with connections to the White House: “The United States may get the blame for the slowness of the recovery in Europe and Canada, but it is their own internal policies that are to blame. They should cut their state regulations and the barriers they have to entrepreneurship.”
But in fact, while Canadian officials were willing to support international pressure on Washington, they also planned to remind other delegations of the contribution that the Americans have made to world economic recovery. Said a Canadian official involved in the process: “That should take some of the sting out of the criticisms.” He added, “We have to remind others that they have a responsibility to sustain the pace of recovery as well.” Most Canadian officials do not expect relief from rising U.S. interest rates in the short term. That view is shared by private economists. Thomas Maxwell, vice-president and chief economist of the Conference Board of Canada, told Maclean’s that he believes there will be another increase in U.S. interest rates—the U.S. prime rate is now 12.5 per cent—in the next few months. Added Maxwell: “They are trying to get their licks in early to tide them over to the end of the year, so there is no need for increases during the actual election campaign period.” Carl Bei-
gie, chief economist at Dominion Securities Pitfield Ltd. and former head of the C.D. Howe Institute, was equally pessimistic. Declared Beigie: “The only thing Canada can do is to sit tight, keep fingers crossed, and hope that things don’t blow up.”
The impact of high interest rates has been most pronounced in heavily indebted Third World countries—and on the U.S., Canadian and European banks that lend to them. Five Latin American countries—Brazil, Mexico, Argentina, Venezuela and Chile—together owe $280 billion. And a one-percentagepoint rise in interest rates increases
their servicing costs by nearly $2 billion a year. Indeed, the danger of default in those countries threatens the stability of the already shaken U.S. banking sytem.
In mid-May Continental Illinois, the eighth-largest U.S. bank, almost failed, and a chill of panic ran through the financial community. U.S. bankers say that if a couple of major debtors suddenly refused to pay at all, it would be hard to measure the impact on the U.S. financial system. No country has done that yet, although Bolivia has temporarily
suspended payments of its $3-billion debt. At the same time, other Latin American governments have begun to serve notice on their creditors that they will determine how much of their hardcurrency earnings they can allocate to debt servicing. The presidents of Brazil, Mexico, Argentina and Colombia in a joint statement in May said that they would not accept “seeing ourselves forced into a situation of insolvency and continuing economic crisis.” They said interest rates had reached intolerable levels, and they plan a joint meeting by mid-month to discuss debt.
Summit officials are expected to discuss methods of stretching out debt payments and smoothing out the impact of interest rate increases. Fully 60 per cent of the Third World’s $700-billion debt was borrowed at floating interest rates, which rise, or fall with the level of the U.S. prime rate. One proposal calls for a cap on interest rates, possibly at 12 per cent. Then, if U.S. rates rose to 14 per cent, the two-per-cent difference would be added to the principal of the loan, not to the interest payments. Still, there are political problems with all such plans.
But while Western bankers are anxious to discuss alternative payment proposals, their governments are not eager to get involved. As one Canadian finance official put it, “Why help banks that made dumb loans?” Indeed, at the summit, he added, the Canadian government will argue that “global approaches” will not work, while case by case action might.
At other times during the summit the seven leaders will address strictly political matters, including the gulf war, East-West relations, Central America and Libya.
But when the talking stops, the results of the 10th annual summit will likely be similar to those of the preceding nine meetings. The bland communiqués traditionally call for less protectionism, increased trade and balanced noninflationary economic growth. They have been honored in principle but not in practice. And the seven nations’ failure to adhere to their commitments has understandably fostered skepticism about the summits’ usefulness. Said economist Beigie: “The summits are basically charades. They serve as lightning rods. Nearly everything that happens afterward would have happened without the summits.” Added Maxwell: “It is an exercise in reaffirmation, a place for value statements.” But this year, a failure to live up to the undertakings in the final communiqué, however modest, may be more costly than ever before.
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