ANALYSIS-G7 cooperation not what it used to be
04:36 a.m. Jun 25, 1998 Eastern
By Henry Engler
LONDON, June 25 (Reuters) - The Group of Seven, a club of the world's
richest economies, is beginning to show signs of fatigue.
Once an effective high-level policy forum during times of crisis, its
diminished influence has become most obvious in the case of Japan's
economic plight, say analysts and former officials of G7 governments.
In the past, such a development would have summoned a strong and
collective response. Now, consumed more by domestic concerns and facing
a much-changed global economy, the group appears sceptical, at times
even divided, over the value of coordinated action.
''We're in a period...where the type of intense coordination and
cooperation within the G7 that was present in the 1980s is now no longer
there for a variety of reasons,'' said David Mulford, a former U.S.
Treasury official who heads Credit Suisse First Boston in London, in a
recent Reuters Television interview.
The change is partly to do with the increasing integration of major
economies and how governments have had to operate against a rising tide
of sometimes destabilising movements of money.
To some extent, it is an ironic tale.
At one level, analysts say there is an argument to be made for closer
cooperation. The linkages between markets in Asia, Europe and North
America are now so close that sound economic fundamentals in one region
can easily be destabilised by negative developments in another.
Paul Tudor Jones, one of the world's most successful fund managers,
summed up the way markets are currently intertwined in a speech in
Chicago this week, pointing specifically to the upheaval caused by the
Japanese yen.
Speaking at a conference of fund managers, he said the correlation
between the yen and virtually every major exchange-traded futures
contract was closer during last week's market turbulence than at any
time in recent history.
On the other hand, the immense power of global markets may have
diminished the influence governments and central banks have in
containing large capital swings.
''The world has changed its mind about the balance of power among
governments and markets in favour of markets,'' said Daniel Yergin,
president of the Boston-based consulting firm Cambridge Energy Research
Associates.
''You have this very rapid interconnection of economies that is
reflective of this decade.''
Analysts say this new reality does not imply the G7 has become impotent
in reversing market trends which are not in sync with economic
fundamentals. Through verbal and central bank intervention, the group
can still have a powerful sway over markets, but the timing of its
decisions, and the need for reinforcing policy measures, have become
more imperative.
''The power of the markets means that governments have to act more
wisely,'' said C. Randall Henning, visiting fellow at the Institute for
International Economics in Washington.
''Half the time markets are volatile because they are looking to the
governments for direction.''
Getting the group to act in unison also depends on where each member is
in its business cycle and to what extent other domestic policy
objectives may be pressing.
In the case of the dollar's rise against the yen, the economic backdrop
is not supportive to the kind of monetary policy changes which would
reinforce currency intervention.
''The only thing they can do to hold the rally (in the dollar) is for
the U.S. to cut interest rates and the Japanese to raise interest
rates,'' said Avinash Persaud, head of currency research at J.P. Morgan
in London.
Domestic reasons in both economies mean neither option appears feasible
at the moment.
The lack of G7 cohesion may also have much to do with what is happening
in Europe, where Germany, France and Italy, have been busy forging a
single currency for 11 European Union nations.
With Britain, European governments make up the bulk of the G7, yet their
interest in intervention appears to have been diluted by their
preoccupation with domestic developments and economic and monetary union
(EMU).
''The Europeans have given first priority to completing and
consolidating monetary union and sometimes have neglected the condition
of the international system,'' said Henning.
Europe's absence from the concerted intervention by the United States
and Japan to support the yen last week could be understood in this
light, but should their support be required in the future, failure to
co-operate might be yet another step backwards for the G7.
''It would be an ominous beginning to the new era of international
co-operation under EMU if they did not participate in solving Asia's
problems,'' Henning added.
((London newsroom +44 171 542 7770))
Copyright 1998 Reuters Limited. |
