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PRESSURE POINT

When leaders of the world's seven leading industrial nations gather in Naples July 8-10 for their annual economic summit, Bill Clinton will be in the spotlight. But not quite the way he planned. The meeting at the foot of Mt. Vesuvius was supposed to be an occasion for the President to accept accolades for his economic achievements: turning the U.S. economy into the envy of the world, winning passage of a North American trade pact, and completing a new global trade deal.

Instead, an eruption of unsettling news threatens to bury the triumphs Clinton wants to trumpet to his counterparts from Japan, Germany, France, Italy, Britain, and Canada. A White House staff shakeup, setbacks in trade talks with Japan, and a falling U.S. dollar threaten to cast the President as a weak leader with tenuous sway over the economy. Some experts worry that market tremors could undermine the U.S.'s stellar growth--and Clinton's stature among world leaders.

The White House response to the diving dollar has heightened these fears. To critics, the unsuccessful attempts to stop the dollar's slide were, well, Clintonesque--marked by flip-flops and internal indecision. For months, top Administration officials seemed content to see the dollar plummet against the yen as a way to shrink the trade deficit. In May, and again on June 24, the Administration intervened with the help of foreign central banks to prop up the buck. But even participating bankers questioned whether the effort would work. Indeed, on June 28, the dollar closed below 100 yen for the first time since World War II, dragging stocks down with it (charts). The Treasury Dept.'s response "has been relatively poor," says Wall Street economist Henry Kaufman.

To be sure, Clinton has his defenders, including many Europeans who believe the markets are judging him too harshly. Some economists believe investors are overreacting to the prospects of stronger growth in Germany and Japan by pulling funds out of U.S. markets. Others believe the currency markets are responding to real economic factors--such as a widening U.S. current account deficit--and do not signal a loss of confidence in Clinton. The market turmoil "has much to do with economic fundamentals and less to do with [Clinton's standing]," says Robert D. Hormats, vice-chairman of Goldman Sachs International Ltd.

FUNDAMENTAL SPLIT. The President himself, in an exclusive presummit interview with BUSINESS WEEK, argues that currency traders are misjudging his performance (page 37). "We think that the fundamental strength in our economy is something that should inspire confidence," the President says.

Still, the market turmoil is creating deep divisions within the Administration. On one side: the so-called "Apocalypse Now" forces led by Treasury Secretary Lloyd Bentsen and Under Secretary for International Affairs Lawrence H. Summers. They favor forceful intervention--even if it fails--to send a strong signal that the U.S. is not indifferent to the greenback's slide. Indeed, in a June 28 speech in New York, Bentsen delivered the Administration's strongest rhetorical defense yet: "We believe a stronger dollar is better for our economy and better for the world's economy."

On the other side are the "fundamentalists" who believe the current turmoil reflects a strong yen, not a weak dollar. This group includes White House economic adviser Robert E. Rubin, U.S. Trade Representative Mickey Kantor, and Council of Economic Advisers Chair Laura D'Andrea Tyson. They believe that the U.S. economy is sound and that the dollar's value should be set by the markets. Says one top aide: "The dollar is in a pretty good place right now with regard to the yen." With Japanese exports to the U.S. increasingly expensive, the fundamentalists say, Tokyo should be more willing to open its domestic market to foreign imports. That could help Japan reduce its $60 billion trade surplus with the U.S. and, in turn, ease upward pressure on the yen.

LAME DUCKS. Clinton aides had hoped to take advantage of the currency crisis to squeeze commitments from the Japanese to open their markets more to medical technology, insurance, and telecommunications. Then Japanese Prime Minister Tsutomu Hata resigned. And the efforts of Japan's Liberal Democratic and Socialist parties to name Tomiichi Murayama as his successor on June 29 only heightened the political uncertainty (page 53). "There's no politician strong enough to strike a deal," laments one frustrated U.S. negotiator.

The Clintonites had been counting on a presummit accord with Japan as an accomplishment they could showcase at the gathering and as a sop to the markets. Indeed, the precooked summit agenda had been kept predictably noncontroversial. G-7 leaders are expected to call for a greater focus on worker training and education, and an end to Eurosclerosis-style regulations that are hampering job creation. For techies, they'll propose globalization of the Information Superhighway. And for Russian President Boris Yeltsin, the Group of Seven will offer modest support: With much of the $43 billion they and global financial institutions pledged last year still unused, the G-7 will simply urge the International Monetary Fund to loosen the purse strings for Russia.

The group's unambitious agenda may stem from the fact that the G-7 table will be set for a flock of lame ducks. President Franois Mitterrand of France is all but certain to depart the Elysee Palace next spring, British Prime Minister John Major's grip on power remains tenuous, and German Chancellor Helmut Kohl is facing a bruising reelection campaign. Major, moreover, recently infuriated Kohl and Mitterrand by single-handedly vetoing their pick to replace Jacques Delors as head of the European Union's executive body.

That may only intensify pressure on Clinton to pull out a surprise that will satisfy the currency markets. If the President does nothing, panicky traders could engage in a massive sell-off that could further roil stock and bond markets. A resulting spike in bond yields would slow the U.S. economy, which has been the engine pulling Europe out of its deep slump. "This weakness of the dollar is a burden for everybody," says Societe Generale Chairman Marc Vienot.

So much for Clinton's hopes of shouting his accomplishments from the top of the summit. Instead, without bold U.S. leadership in Naples, the turbulent markets may remind the U.S. President and the other summiteers that they're meeting under a volcano.

CLINTON'S ECONOMIC OBSTACLE COURSE

G-7 SUMMIT Finance ministers will discuss the dollar's troubles July 8-10 in Naples. Markets will be watching for signs that Clinton can take the lead in global economic policy.

FEDERAL RESERVE BOARD Traders are pressuring the central bank to bolster the dollar by raising interest rates at its July 5-6 meeting. But with economic growth slowing to 3.4% or so, the central bank may be reluctant to act now.

JAPAN A soaring U.S. trade deficit and Clinton's failure to pry open Japan's markets has unnerved currency traders. The U.S. had hoped to break an impasse in trade talks before the G-7 meeting, but political turmoil in Japan has clouded prospects.

BUNDESBANK The German central bank doesn't want to cut official interest rates for fear of rattling traders. But if a mid-July report shows a decline in money growth, the Bundesbank could resume rate-cutting.Dean Foust and Douglas Harbrecht in Washington and Bill Javetski in Paris, with bureau reports


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