Against a backdrop of increasing concern that the Persian Gulf oil crisis will trigger a global recession, finance ministers and central bankers of the Group of Seven industrialized nations will meet today at Blair House to debate a strategy to deal with the situation.
Despite worries over the shaky economic outlook, the G-7 is expected to offer reassurance that the rest of the world will be able to cope with the crisis because the severity of the oil price increase appears to be less than the oil "shocks" of 1973-74 and 1979-80.
Members of the G-7 are the United States, Germany, Japan, Great Britain, France, Canada and Italy. The United States will be represented by Treasury Secretary Nicholas F. Brady and Federal Reserve Board Chairman Alan Greenspan.
The meeting, a regularly scheduled event, will be followed by the semiannual meetings of the World Bank and International Monetary Fund (IMF) policy boards tomorrow and Monday.
Observers expect the G-7 to endorse commitments already made by the IMF and World Bank to help soften the impact of higher oil prices on Third World nations, especially on two groups that may be the hardest hit: the emerging Eastern European democracies, and the "front-line" nations of Turkey, Jordan and Egypt, caught in the economic struggle between Iraq and its United Nations opponents.
But a divergence of view appears to be shaping up between Brady -- host for this meeting -- and the rest of the G-7 countries over the proper American strategy to counter diminished global economic growth in 1990-91.
Brady, supported by President Bush, has pressured the Federal Reserve Board to lower interest rates to battle recessionary tendencies, now exacerbated by higher oil prices. The cost of a barrel of oil rose past $35 a barrel this week, compared with $18 before Saddam Hussein's invasion of Kuwait.
But Greenspan worries that lower interest rates will depress the dollar -- already down sharply this year -- discouraging foreign investment that helps finance the deficit. Greenspan's caution is supported by the other powers, who fear that driving the dollar down would exacerbate a potential shortage of investment capital stemming from domestic problems in Germany and Japan, which have in past years directed their surplus capital to the United States.
Japan has been shoring up its banks, which have been hard hit by falling Tokyo stock market prices, and Germany has been paying for unification costs and assistance in Eastern Europe. As a result, both have indicated that more of their capital will have to stay home. Some market analysts see signs that this is already happening.
The IMF's World Economic Outlook report this week said these new needs for capital "underscore the importance and the urgency of increasing world saving."
No one is expecting specific action on easing the capital shortage or boosting world savings -- beyond the usual pledges to trim budget deficits -- but the G-7 communique may take note of the problem, and it is likely to be a major theme of speeches during the joint annual IMF/World Bank meeting that starts Tuesday.
Although the dollar has been weak for the past several months, Treasury Undersecretary David C. Mulford said this week that the decline has been "orderly." The U.S. government is not concerned, he said, and is making no effort to push it up. If anything, officials think that the weak dollar is a positive element for the U.S. economy because it will help stimulate exports.
Other topics for the G-7 include an assessment of the Third World debt problem, which continues to hold back many poor countries despite the introduction last year of the Brady Plan. British Chancellor of Excheqeur John Major is pressing for expansion of a plan adopted at the 1988 Toronto Economic Summit that would write off much of the government-to-government debt of the world's poorest nations.
Finally, the G-7 will discuss prospects for closer relations with the Soviet Union. IMF Managing Director Michel Camdessus is scheduled to give a progress report on a recently launched study of the Soviet economy launched in July at the Economic Summit in Houston.