This week's summit of the leaders of the largest industrial countries--the United States, Canada, France, Germany, Italy, Japan and the United Kingdom--comes at a critical moment for the world economy. Continuing large trade deficits, a fundamentally weak dollar, uncertain growth prospects, increasing protectionism and the re-emergence of the Third World debt problem are all symptoms of tensions and pressures that are producing a sense of risk in the United States, Western Europe and Japan.
Unfortunately, most of the leaders who are gathering in Venice face national elections within the next 18 months; some will leave office this year or next year. Almost inevitably this means that short-run domestic political concerns will shadow discussions of international economic strategy, making it harder to achieve consensus, or, perhaps, even to acknowledge the looming risks in the global system.
Moreover, the summit will have to deal with the unrealized expectations created at last year's summit in Tokyo. At that time the conventional economic analysis held that the lower dollar, falling oil prices and declining interest rates had created the conditions for a significant increase in economic growth without risking any revival of inflationary pressure. The view was that the combination of the dollar's fall and existing economic policies would be enough to reduce the U.S. balance of payments deficit as well as the Japanese and West German surpluses.
Since Tokyo, both the economic and political moods have changed. The low dollar and low oil prices have proven to have mixed consequences. The dollar's rapid decline has only barely begun to shift nominal trade balances, but has adverselyaffected levels of economic activity in Germany and Japan, in part because their export industries have deteriorated sharply. Similarly, while lower oil prices produced the expected moderation in inflation in the United States (the world's second-largest oil producer), Britain and Canada, the negative impact on investment and regional economic activity apparently offset much of the expected gain in growth.
On the policy side, the positive impact of the launching of the new trade round has been reduced by the lack of progress in beginning substantive negotiations, and by evidence that there is little underlying political commitment to forgo protectionist measures during the negotiations. The whole matrix of bilateral relationships among the summit countries has come under increasing strain because of new protectionist actions or threats of actions.
In similar fashion, the sense of international agreement about how currency relationships should be managed disappeared during 1986 and was replaced by bickering about whether the dollar had fallen far enough or should go lower.
President Reagan and the other leaders in Venice face a long list of economic challenges in addition to the failures of analysis or action during the past year. The success of the summit--and, for that matter, the near-term economic outlook for the United States--will hinge on the performance of Western leaders in several interrelated areas:
- Creating a shared vision about how world economic growth can be sustained and a shared understanding of the roles that the largest industrial countries should play.
- Redressing the balance-of-payments imbalances among the industrial countries, while halting the continued slide toward the interrelated perils of mercantilism and protectionism.
- Coping with the consequences of the growing foreign and domestic indebtedness of the United States, now the world's largest net debtor.
- Devising a strategy that can deal effectively with Third World debt, in part to stimulate demand for U.S. and other industrial nations' exports.
- Recognizing that the current international institutional framework (the World Bank and International Monetary Fund), which was largely designed 40 years ago, needs to be brought into line with much-changed economic and political circumstances.
Unfortunately, there is little indication that Venice will be much more than an attractive backdrop for a series of photo opportunities. The agenda is cluttered with issues like AIDS, agricultural policy and the security of the Persian Gulf, which, while important in themselves, would be better addressed elsewhere.
The intensity of the trade and financial disputes among the major industrial countries since the Tokyo summit is a measure of the deterioration that has occurred in the dialogue between the United States and its allies. And the political weakness of most of the participants means that they are unlikely to take significant risks, without which progress is impossible.