USA Today cover story. G-7 nations grapple with economic crisis
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09/15/98- Updated 07:40 AM ET
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Time may be running out for the world economy.
That was the scary subtext of a surprise statement issued Monday by
economic policymakers from the USA and the world's other major
industrialized nations.
After months of collective silence, the Group of Seven nations (G-7)
took the unusual step of publicly expressing their determination to deal
with what they called "exceptional pressures in financial markets and
deteriorating prospects for growth" in the world economy.
The statement came on the heels of a major policy speech on global
economic conditions by an embattled President Clinton and was
designed to reassure skittish investors that top financial leaders are on
the job and able to pilot the world economy through the mushrooming
crisis.
But in some ways the statement and its timing underscore how risky the
situation is, experts say.
Finance ministers and central bank chiefs from the G-7 - Britain,
Canada, France, Germany, Italy, Japan and the USA - are scheduled
to meet in Washington, D.C., on Oct. 3 for a regular review of the
world economy. But the policymakers, including U.S. Treasury
Secretary Robert Rubin and Federal Reserve Chairman Alan
Greenspan, apparently felt they couldn't wait that long to issue
reassurances that they're not asleep at the switch.
"They understand that there are huge risks to the U.S. and the world
economy, and that the markets will not wait for Oct. 3," says Allen
Sinai, chief global economist at Primark Decision Economics, a
Boston-based consulting firm.
But it's not clear how much they can do to resolve a crisis that began
almost 15 months ago in Thailand and has spread like wildfire
throughout the world economy.
The stakes involved are large. The spread of the crisis to the USA's
back yard in Latin America - Ecuador on Monday became the latest
developing country to devalue its currency - has rocked Wall Street
and raised questions about how long the USA can be what Greenspan
called an "oasis of prosperity" in a turbulent world economy.
The continued failure of Japan to get a handle on its long-festering
economic and financial problems heightens the chances of a deflationary
spiral in the world's second-largest economy and raises the risk of a
major bank failure that would shake the world monetary system.
Stakes are high
But there's more at stake than just the USA's - or even the world's -
immediate economic well-being. The crisis has thrown a roadblock into
what had seemed to be an inexorable march to more open markets and
societies since the end of the Cold War.
In Russia, the new prime minister, Yevgeny Primakov, has named a
communist and former head of central planning in the Soviet Union as
his top economic lieutenant. In Malaysia, Prime Minister Mahathir
Mohamad has tried to wall his country's economy off from the rest of
the world by introducing stiff controls on capital. And even in Hong
Kong, the bastion of free and open markets, the government has felt
compelled to use its own money to buy up shares and fight off
speculators in the stock market.
"This is the biggest financial challenge facing the world in a half century,"
Clinton told the Council on Foreign relations think tank in New York
on Monday.
In recognition of the growing risks, the G-7 nations pledged to work
together to promote growth in their own economies and even hinted at
the possibility of coordinated interest rate cuts to help bring that about.
Experts say the statement increases the odds that Fed policymakers will
reduce rates at their next scheduled session Sept. 29. But Greenspan
probably still faces an uphill battle in convincing the central bank's
anti-inflation hawks to go along.
"Greenspan doesn't have very much time to twist the arms of skeptics
at the Fed," says Todd Bucholz, who acts as an adviser to big hedge
fund investors.
General Motors Chief Executive Jack Smith added his voice Monday
to business leaders calling on the Fed to cut rates.
"While the world seems to be crumbling around us, the U.S. remains
strong.... We believe the Federal Reserve could - and should - ease the
burden abroad by cutting interest rates and adopting a more expansive
monetary policy," the head of the USA's No. 1 car company said in a
speech in Detroit.
"The question is whether the Fed will wait until the recession is
imported and then act, or act now. GM believes it should act now," he
added.
But even if the Fed heeds that call and eases credit, some experts
question whether a small cut in short-term interest rates in the USA
would make much difference on its own in resolving the spreading
financial crisis.
"How much will a cut in U.S. rates really ease the problems in Russia,
Latin America and the Far East?" Wall Street veteran Henry Kaufman
asks. "Not all that much."
Part of the problem is that much of the solution to the crisis lies outside
of the G-7's control. It depends on countries such as Russia taking
tough steps to stabilize their economies. "We need to be honest with
Russia and everyone else," Clinton said. "No nation, rich or poor,
democratic or authoritarian, can escape the fundamental economic
imperatives of the global market."
It also depends on global investors not panicking and yanking their
money indiscriminately out of all emerging market economies, as
seemed to be the case at one point last week when stock markets
throughout Latin America plunged. In their statement, G-7 finance
ministers and central bankers "expressed concern about the extent of
the general withdrawal of funds from emerging markets."
Experts such as Kaufman say there's no silver bullet to resolve a global
crisis and that a broad array of measures is needed to bring the turmoil
to an end. But those steps, including radical measures to help
debt-ridden developing nations, might require the sort of global
leadership that has so been sorely lacking. Clinton has been
preoccupied by a sex scandal that is threatening to force him out of
office. German Chancellor Helmut Kohl has been fighting for his
political life in elections later this month. And Japanese Prime Minister
Keizo Obuchi has been hobbled by a divided parliament that is balking
at passing critical banking legislation.
Reassuring global markets
Experts say that the G-7 statement - and Clinton's speech - were partly
designed to reassure investors that the world economy is not
rudderless. "This was a pretty well-orchestrated effort to fill the
leadership vacuum that Clinton and his indiscretions have created," says
David Gilmore, partner at Foreign Exchange Analytics, a consulting firm
in Essex, Conn.
"As scarred and wounded and embarrassed as Clinton is, the G-7 don't
have much more," Bucholz says. "He's still the tallest and biggest and
the most important of the G-7 dwarfs."
For the moment, the G-7 effort to reassure the markets seems to be
working. Wall Street stocks climbed sharply Monday, partly on hopes
that the worst may be over for Clinton and that he soon may be in a
position to exercise more leadership on the international front.
But economists say that the crisis is far from over and warn that the
markets' relief may prove short-lived.
"There's real damage control emerging from the G-7 collectively,"
Gilmore says. "But I'm not sure the statement alone will take care of all
that's wrong with the world economy."
By Rich Miller, with Mimi Hall, Micheline Maynard and Beth
Belton contributing, USA TODAY
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