Business: The Economy
Boosting global growth
Asian storms have threatened to engulf the world
Finance ministers from the seven leading industrial
countries, the G7, are meeting in Bonn this weekend in
a crucial attempt to avoid the world slipping into
recession.
With US economic growth set to slow this year, US
Treasury Secretary Robert Rubin is keen to gain
agreement for a package of measures to boost
economic growth in Japan and Europe.
"The balance of risks in the
global economy has shifted,
and that highlights the
importance of sound,
growth-oriented policies in all
of the G7 countries," he said.
The meeting will also try to
agree rules for dealing with
the next financial crisis. After
two years of turmoil, France
and Germany, with some
support from Japan, will urge
tighter regulation of global
financial markets, including
limits on hedge funds, and co-ordination on exchange
rates.
Since its launch, Europe's new single currency, the
euro, has been falling against the dollar, while the yen
has been subject to wild fluctuations in the past year.
Oskar Lafontaine, the German finance minister, says he
accepts that more economic convergence is required
before currency target zones will work.
"Without this, you cannot hold exchange rates stable,"
he said.
But the European push for currency target zones has
been weakened by dissenting views from Italy and the
UK.
"In the history of currencies, exchange rate restrictions
have usually been counter-productive," said Italian
Treasury Minister Carlo Ciampi.
Meanwhile the Japanese, whose economy is the worst
affected by the global recession, seem to have run out of
options for stimulating growth. Japanese base rates have
been cut to 0.15%, and two economic stimulus
packages have worried the bond markets more than they
have encouraged consumers.
Trade tensions
The disparity between the booming US economy and the
weak growth in Europe and Asia has led to trade
tensions. The US has been serving as the importer of
last resort for the world economy, and as a result has a
burgeoning trade deficit.
"The international system cannot sustain indefinitely the
large current account balances created by the disparities
in growth and openness between the United States and
its major trading partners," said Mr Rubin.
The United States is already
embroiled in increasingly
bitter trade disputes with
Europe over banana and beef
exports, and with Japan over
steel imports.
Now a further fall in the
Japanese currency since the
move to cut interest rates
further is exacerbating
tensions.
Last year alarm at the falling
yen prompted the US
Treasury to make a rare
intervention in the currency market.
International institutions Getting a grip on the wild
fluctuations of the world's financial markets will be
another top item on the agenda.
Since last autumn, when the financial crisis threatened
to bring down the global economy, some Western
leaders have called for a restructuring of the
"international financial architecture."
Among the changes proposed have been:
A redesigned International Monetary Fund - more
open and moving to nip currency problems in the
bud
Better rules for regulating banks and stock
markets in developing countries
Increased lending to companies affected by the
crisis
Possible restrictions on capital inflows to some
developing countries and on the hedge funds that
lend to them
Some economists suggest a more ambitious plan - a
world financial authority, a central bank, that could
intervene globally to prevent the next crisis.
But with agreement proving difficult even on the more
minor changes to the system, the impetus for a major
rethink of the world financial system seems to be fading.
History of co-ordination
The history of the G7 group - made up of France,
Germany, Italy, Japan, Canada, the US and the UK -
demonstrates the difficulty in achieving international
policy co-ordination.
The G7 was set up in the 1970s at the initiative of the
French to help solve the economic dislocation caused by
the oil crisis throughout the industrialised world. It
included an annual summit of world leaders as well as
regular, more detailed meetings of finance ministers.
Its finest moment was in the 1980s, when agreement
was reached with the United States for a managed
devaluation of the dollar, which was at an all-time high.
The Plaza Accords (named for the swank hotel in New
York where the agreement was negotiated) led to hopes
that currency "target zones" could be permanently
negotiated between the world's major currencies.
The crisis engulfing Europe's exchange rate mechanism
during the late 1980s and early 1990s and the deepening
Japanese recession have made that impossible. Now,
with Japan again encouraging a weak currency to boost
its flagging economy, some sort of co-ordination could
again be on the agenda.
If nothing is done, some economists believe that the
creation of the eurozone, while increasing EU currency
stability, will make the fluctuations between the big three
- the dollar, the yen, and the euro - more severe.
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