The declining dollar should set the agenda. To boost exports and pump up corporate profits, the U.S. is encouraging the first significant fall in the dollar in nearly two decades. Combined with huge tax cuts, amounting to about 1% of gross domestic product in 2003, and extremely low interest rates, U.S. economic policy is highly stimulative. In short, the U.S. is doing its part to boost the global economy.
Not so Germany and Japan, two economic locomotives of the past that have virtually stopped growing. The European Central Bank is failing to cut interest rates fast enough to foster German economic growth. The European Union's Stability Pact prevents Germany from increasing government spending just when it needs it. And now the rising euro is slowing German exports and cutting profits. Germany is stuck in policy paralysis.
The single most important priority at the June economic summit meeting should be to get the ECB to cut interest rates sharply -- and soon. The second should be to refashion the EU's Stability Pact so that it is flexible, loosening fiscal policy during times of economic slowdown and tightening up in a boom. The current one-size-fits-all cap on deficit spending of 3% of GDP is simply bad policy. The summit is also the place to pressure Germany and France to complete proposed labor and pension reforms. Without real structural reform, Continental Europe has little hope of regaining its locomotive role in the world economy.
As for Japan, summit leaders should resist the tendency to write off the world's second-largest economy as both hapless and hopeless. They should loudly protest Tokyo's latest bailout of another large bank and push for more financial reforms to invigorate growth. Japan's economic policies increasingly favor its rapidly aging population over the young. With 19% of its population already over 65, vs. 14% under 15 (in the U.S., 13% of the people are over 65, vs. 21% under 15), Tokyo is acting to preserve wealth, not create it, and stabilize the economy, not change it. This can only lead to national decline. Summit leaders should encourage Japan to be part of the global economy's future, not its past.
As they leave the summit, the world's leaders should ponder one additional matter -- the inadequacy of international economic institutions. The Group of Eight doesn't include China, which has a growing economy that is bigger than France's. The ECB and the EU Stability Pact are currently structured to restrain the Continent's strongest economy, Germany. The World Trade Organization is proving unable to solve growing European-U.S. trade tensions. There is a lot of economic work to be done to get the global economy growing again. The summit is a place to begin.