The international economic cooperation process, as managed by the world's leading nations through the so-called Group of Seven, has fallen on hard times. Gone are the days when the G-7's predecessor, the Group of Five, acted boldly at New York's Plaza Hotel in 1985 to devalue an overvalued dollar. (Whether the Plaza Accord, which in retrospect gave Japan commanding economic strength, represented good policy is a matter for separate debate).
The G-7's clout may have peaked at the Louvre Palace early in 1987, when it set "target zones" to limit currency fluctuations. For a time, that worked. But in Paris last April, when called together in special session to deal with a declining Japanese yen, the G-7 had to admit it was powerless to take corrective action.
Last weekend, the limits of the G-7 process were further exposed when it met at the Stanhope Hotel in New York, anxious to assure exchange markets it could keep currencies stable, even in wartime. But the reality is that because of diametrically opposing economic conditions that drive interest rates in different directions, the G-7 ministers are in no position to make good on such a promise.
Manifestly, there is little common ground among the leading nations that can lead to a coordinated economic policy -- hence little reason to expect stability in rates, except between the yen and the mark. The dollar for the moment gets wartime support from those investors seeking a "safe haven." Treasury Secretary Nicholas F. Brady said that no one is smart enough to predict which way the dollar is going in the long run, but market professionals say the direction is down.
Brady, Federal Reserve Board Chairman Alan Greenspan and their counterparts in the G-7 could promise merely to "strengthen" their cooperation by maintaining "open telephones" if exchange rates start to bounce around in wild fashion. To determine whether they'd intervene -- say, to stop a plunging dollar -- Brady said the test would be whether "there had been movement in one direction or the other out of character with the basic strength of currencies."
Big deal. That's hardly the stuff that can be dignified as a "Stanhope Accord." The problem for the well-meaning G-7 ministers is that their domestic economic problems now take precedence over global concerns -- despite the war in the Persian Gulf. Japan and Germany are still enjoying solid economic growth, while the United States is in recession and, despite a huge budget deficit, is the leading power in a costly war effort of up to a billion dollars a day. Interest rates in Japan and Germany are high -- and possibly rising -- while interest rates in the United States are low, and probably will be moved even lower by the Federal Reserve Board to counteract recession.
On the other hand, the German Bundesbank, facing a huge government budget deficit caused by unification costs, is keeping interest rates high to counter inflation. A new boost in German rates would not be a surprise. The Bank of Japan is pursuing almost as tight a policy.
Meanwhile, declining economic activity worries not only the United States, but Britain, Canada, Italy and France, while smaller countries in Europe -- tied to the mark through the European monetary system -- are fearful they will slip into recession if their currencies are forced to appreciate.
The strong performance of the German economy generates a great deal of political ambivalence in Europe. On the one hand, European business leaders wish their politicians could emulate German success by doing as the Germans do. But as Goldman Sachs & Co. Vice President Robert Hormats notes, appreciating European currencies will serve to give Japan an extra margin of competitiveness for its exports to Europe. He cites data showing that, over the past two years, shifting currency relationships have given Japan a 40 percent edge against the European Community, generating a Japanese annual trade surplus close to $20 billion.
There are other issues that divide the G-7 at this critical stage of history. The United States and Canada would like to jump-start the Uruguay Round of trade negotiations, but they get no help from farm-protectionist Japan and Europe. Brady would like to see substantial debt relief for Poland, to which the Europeans, who have lent Poland most of the money, in effect say: Mind your own business.
And except for the Germans, who want to keep intact their political and business ties to the Soviet Union, the other main powers want to punish Moscow for attacking the Baltic States by withholding the economic assistance -- including some relationship with the World Bank and International Monetary Fund -- promised as a reward for perestroika and glasnost.
Then, there's the tab for the Persian Gulf War. Uncle Sam has been forced to pass the tin cup to help pay for the huge costs. President Bush isn't happy to be begging Japan, and Japan's Prime Minister Toshiki Kaifu and German Chancellor Helmut Kohl aren't happy to be giving. In the G-7, as in other family relationships, money -- how it's doled out and how it's spent -- becomes a source of contention.