TOP OF THE NEWS: Commentary
IT'S TIME FOR THE GROUP OF SEVEN TO ACT AS A GROUP
Growth rarely happens as planned or hoped. Today, all three of the industrialized world's powerhouses are weak or weakening and the global economic outlook is dimming. Already, some economists are calling for a coordinated response to the widening slump. That call should be heeded, despite the difficulty that government officials have had in building consensus across borders. The alternative -- inaction or overreaction -- carries too many risks.
As recently as the 1970s, cooperation meant that the U. S. took the lead in spurring growth by easing monetary and fiscal policies, while Germany and Japan followed reluctantly, hoping to garner the fruits of growth without the penalty of rising prices. The strains of the 1980s, though, and the growing heft of America's major competitors, culminated in more genuine cooperation. The Group of Seven industrialized nations collaborated in 1985 in bringing the dollar down from its lofty heights, and West Germany, Japan, and the U. S. coordinated a series of interest-rate cuts in 1986. But the financial markets weren't always convinced, and for domestic reasons officials haven't always wanted or been able to deliver the policy changes needed to correct economic imbalances. So seizures such as the October, 1987, stock market collapse have struck.
DANGEROUS SHOCKS. Still, however flawed, cooperation may be better than the alternative -- the chaotic and unbridled pursuit of self-interested national economic policies. "It's time for the G-7 to go back to what they were doing in 1986 and coordinate a series of interest-rate cuts," says C. Fred Bergsten, director of the Institute for International Economics in Washington. Germany, he says, should couple monetary easing with fiscal tightening, because assistance to the eastern part of the country has pushed the budget deficit up. Japan, meanwhile, could afford both monetary and fiscal ease, since the combined national and local budgets there are in surplus. The U. S., for its part, should keep cutting rates. Otherwise, says Bergsten, the global economy will remain sluggish at best.
More worrisome, a shock could send it reeling into recession. In the past, oil shocks have dealt body blows. In the 1990s, there's the danger that the disintegrating Soviet empire, characterized by ethnic strife, uncertain leadership, and economic chaos, could do similar damage. "People just aren't focusing enough on what's happening there," says Steven H. Nagourney, senior vice-president at Shearson Lehman Brothers Inc. The turmoil could easily spill over into Europe, and the financial markets might quickly convulse.
With the destructive potential for such a shock lurking, economic officials should be laying the groundwork for more cooperation. "We've got extremely fragile economic conditions," says Gail Fosler, chief economist at the Conference Board. "You'd think that there would be a desire to get a coordinated response together." Instead, says Fosler, the Japanese are saying that they'd be content with a stronger yen, while the Germans remain fixated on reining in inflation. Even absent a shock to the system, this go-it-alone strategy could cause problems. Fosler's immediate fear is that German and Japanese hesitation to ease will prompt an American overreaction. An aggressive pump-priming tax package, aimed at getting money into consumers' pockets and out of them in a hurry, could reverse the narrowing of the trade deficit. And longer-term, it could be inflationary.
The classic case against coordinated easing is that it could well fuel price increases. Price stability is a legitimate concern in Germany, where inflation, at 3.5%, is running higher than in neighboring France for the first time in 25 years. But for much of the industrialized world, prices are relatively stable, and inflation is no longer considered a serious threat.
More compelling is the argument that each of the major industrial nations is faced with unique problems that demand specific solutions. The U. S. is working out debt-induced structural difficulties, Japan is bursting the bubble of inflated land prices, and Germany is integrating its eastern region into the economy. That's all true. But addressing those domestic problems shouldn't preclude facing international responsibilities. It might just be healthier for both the U. S. and the world if central bankers and finance ministers would agree on a little judicious and concerted monetary easing.Karen Pennar