French authorities joined Japan yesterday in advocating that the West's five leading industrial nations seriously discuss a coordinated effort to lower interest rates at their meeting in London this weekend.
French Minister of Finance Pierre Beregovoy told a meeting of the Foreign Policy Association in New York that "we have to tackle this problem boldly." He predicted that ultimately the five nations -- the United States, France, West Germany, Japan and Great Britain -- known as the Group of Five would take joint action to bring interest rates down.
The suggestion for a concerted drive to lower interest rates was first brought up by Japanese Prime Minister Yasuhiro Nakasone. It became a subject of controversy on Wednesday when German Minister of Economics Martin Bangemann told reporters in Washington that Treasury Secretary James A. Baker III would try to have the issue decided at the G-5 meeting in London.
Baker, along with Federal Reserve Board Chairman Paul A. Volcker, will represent the United States at the London conference, which begins with a working dinner tonight and is scheduled to conclude on Sunday.
Joint action on interest rates would be of equal significance to the decision by the Group of Five at a meeting in New York on Sept. 22 to act together to bring down the international value of the dollar -- an effort which has had success so far.
But Treasury officials, acknowledging that they would like to see interest rates come down, denied Baker was seeking such an agreement, and one official said Thursday that "there simply is not going to be a coordinated interest-rate reduction exercise."
Asked after his speech whether Baker or Volcker had communicated a desire to lower interest rates at the G-5 session, Beregovoy said "no," according to the Dow Jones News Service.
But Beregovoy's endorsement of the idea of a coordinated approach on interest rates suggested a split within the G-5 on the practicality of the idea. Bangemann had said that his country, like the others, would welcome lower interest rates, but that there would have to be "an effective mechanism," especially a major reduction in the U.S. deficit. In Britain, the emphasis at the moment is an effort to stop a further rise in interest rates.
American officials have expressed doubt that central banks could actually coordinate monetary policy. After Bangemann's statement Wednesday, a Treasury official said that an effort to coordinate interest rate policies "would have no credibility," noting that in this country interest rate policy is directed by the independent Federal Reserve System.
Fed officials, led by Volcker, have been cautious about moving too quickly to a softer monetary policy until a sharp reduction in the federal deficit is produced either through the Gramm-Rudman-Hollings process or a change in fiscal policy through a tax increase, alleviating fears of a renewed inflation.
But Beregovoy, like his Japanese colleagues, stressed the need for lower interest rates as a catalyst for global economic recovery.
"For years we have been saying that, because interest rates are too high, they have an adverse effect on the economy. If the current situation were to continue, disinflation would be compromised, and recession would soon show up on the horizon," he said."
Beregovoy added: "If we postpone reduction of interest rates for too long, we shall be putting the brakes on recovery, and we could even jeopardize it altogether. But without a return to strong growth, any decline in unemployment will remain limited and precarious."
He claimed that a two-point reduction in interest rates would save Third World countries $5 billion a year, "or roughly the equivalent of what we would be asking commercial banks under the Baker proposal." This was a reference to Baker's suggestion last October than commercial banks boost their lending to major debtors by $20 billion over three years.
The G-5 meeting, in addition to discussing the interest rate question, is expected to review progress of the dollar devaluation since the New York session, and the Baker debt initiative. Beregovoy said the drop in the dollar since then -- about 10 percent, for a total decline of almost 25 percent since the early 1985 peak -- was satisfactory, although some may feel it should move a bit lower.
Bangemann, on the other hand, indicated this week that the Germans did not want to see the mark appreciate further. A similar position on the yen is taken by Japanese authorities. And American officials have given no indication that they are pressing either the Germans or Japanese for a further appreciation in their currencies.