G8
Ignores Mounting Problems
In World Economy
By Nick Beams
18 July 2006
World
Socialist Web
In
its early years, the heads of government meeting now known was the G8
was regarded as a means of co-ordinating the policies of the major capitalist
powers to try to overcome major problems in the world economy.
Those days have long gone.
At the conclusion of this year’s summit the state of the global
economy was listed under “Other Issues” in the official
summing up. The statement noted merely that “global growth remains
strong and has become more broadly based” while there was also
discussion on “high and volatile energy prices, global imbalances
and growing protectionism”. “We re-iterated our commitment
to address global imbalances, working together to remove distortions
to the global adjustment process, promote liberalization of trade and
investment, and modernize the international financial institutions.”
The scant attention to the
global economy, let alone any discussion of co-ordinated economic policies,
is remarkable given the fact that, despite continued economic growth,
the world economy is facing a series of problems as serious as any since
the so-called Asian economic crisis of 1997-98.
Oil prices are hitting new
records, with predictions that they could reach as much as $100 per
barrel, the risk of a slowdown in the US economy is increasing, there
is a simultaneous tightening of interest rates in the three major economic
regions for the first time since the early 1980s, growth remains sluggish
in Europe and agreement has yet to be reached on the Doha Round of trade
negotiations, with the prospect that failure to do so will bring increased
protectionism.
The stalled Doha Round was
the subject of intense discussions on the final day of the summit following
an intervention by World Trade Organisation director-general Pascal
Lamy.
Lamy, who was mandated by
WTO negotiators to try to bridge the gap in the trade talks after they
broke down on July 1, indicated that progress towards narrowing differences
over the past two weeks had only been “marginal”.
“The deadlock in which
we are caught will lead us to failure very soon if you do not give your
ministers further room for negotiation,” he told the meeting.
“A failure would send
out a strong negative signal for the future of the world economy and
the danger of a resurgence of protectionism at a time when the pace
of globalisation is weighing heavily on the social and economic fabric
of many countries and when geopolitical instability is on the rise.”
The main sticking points
are the demands by the US and the EU for further concessions from the
so-called developing countries, led by Brazil and India, on tariff reductions
on industrial products, and demands that the EU offer bigger cuts in
farm tariffs and the US reduce agricultural subsidies.
It appears that there are
sharp differences within the EU. According to a report in the Financial
Times, while the European Commission president José Manuel Barroso,
British prime minister Tony Blair, German chancellor Angela Merkel and
Italian prime minister Roman Prodi all struck an optimistic note, the
French president Jacques Chirac said the EU had reached the outer limit
of its negotiating mandate.
“We have made enough
concessions, unless there is a very important counter offer by our American
friends,” he told reporters at the conclusion of the summit.
There is little sign of movement
on the US side. American negotiators have insisted that the US needs
new markets for its agricultural exports but India and other poorer
countries have so far rejected US demands on the grounds that they have
to protect small farmers.
Before leaving St Petersburg,
Sean Spicer, the spokesman for US trade representative Susan Schwab,
repeated American claims that others had to move more than the US. On
the other hand, an EU official commented: “If the US is calling
for ambition in market access, it needs to show similar ambition in
terms of reducing farm subsidies.”
The conflicts over trade
indicate that the reason there is so little discussion on the imbalances
in the global economy—the ever-increasing US deficits financed
by the central banks of East Asia—is because no common approach
can be agreed to on their resolution.
During the late 1990s in
the wake of the Asian economic crisis, there was considerable discussion
on the need for international co-operation and a new global financial
architecture. But at the St Petersburg summit one of the most significant
economic events of the recent period passed without comment.
The decision by the Bank
of Japan (BoJ) last Saturday to lift its overnight call rate from zero
to 0.25 percent ended the six-year long zero interest rate regime. The
BoJ said the decision was necessary because leaving rates at zero could
lead to “large swings in economic activity and prices in the future”.
The move has far-reaching implications both for currency relationships
as well as the financial flows which have sustained the $800 billion
US balance of payments deficit.
It means that for the first
time since the early 1980s, the Bank of Japan, the US Federal Reserve
and the European Central Bank are all tightening interest rates and
draining away funds that have been used to finance the assets boom of
the past period.
Japanese rate tightening
has particular significance because funds raised in Tokyo have played
a key role in financing so-called carry trades in which funds raised
at a cheap rate in one market are used to finance risky trades in others.
The question now being asked
is whether the BoJ decision will be followed by further increases which
would immediately impact on the world economy. As the Financial Times
noted yesterday: “Future rises in Japan’s interest rates
could encourage Japanese investors to invest their money at home rather
than abroad. The danger is that this could lead to a higher yen and
a fall in the value of foreign assets as a result of lower demand. Less
investment in US assets could bring a bursting of the US housing bubble
and a brake on consumer-led growth, spreading economic pain across the
world.”
The economics correspondent
of the British Daily Telegraph, Ambrose Evans-Pritchard, described the
policy shift as an “epochal turning point”, noting that
Japanese pension funds, insurers and individuals hold funds abroad of
$2,500 billion, almost equivalent to the overseas holdings of the rest
of the world. “If they repatriate part of this money to exploit
rising returns at home, the world will feel the tremors.”
As with all the summits of
the recent period, the St Petersburg gathering prompted comment on the
relevance of the G8.
An editorial in the Australian
Financial Review on Monday took up the issue of the Doha Round insisting
that it would be “unacceptable if the St Petersburg G8 only manages
to produce the sort of glib, motherhood communiqué which is almost
invariably the production of these summit meetings.”
To have met and failed to
make a contribution to dealing with the challenges confronting the global
economy “would not only be a lost opportunity but would also leave
the value of G8 summits in greater doubt,” it said.
Similar sentiments were voiced
on the other side of the world. According to Financial Times columnist
Wolfgang Munchau: “The multiple failures of the St Petersburg
summit raise the question of whether the Group of Eight leading industrial
nations still serves a useful purpose. The reason is not a lack of important
issues that require global co-ordination. On the contrary, rarely has
there been a greater need for joint action. But no matter whether you
want to rescue a failing trade round, improve energy security or influence
the global financial markets, the G8 is the wrong group.”
Munchau wrote that the problem
of global imbalances, which had become more acute in recent years, had
to be addressed by a Group of Four consisting of the US, the eurozone,
Japan and China.
But a G4 would no more be
able to address the issue of global imbalances because the problem is
not the numbers involved or the diffuse agenda but the conflicting interests
of the major powers.