Global Glue Is Up to Us
In the wake of the stock market crash, financial experts are agreed on one thing: It will be very difficult to keep the global economy glued together without much more international economic cooperation than has existed in the past. There are some encouraging signs that such cooperation may be forthcoming--if President Reagan and the Democratic Congress can get their act together.
International economists were roughly agreed on two things even before stock values plummeted in New York, London, Tokyo and other stock exchanges. One was that the United States should cut back its huge budget deficit in order to help stabilize the dollar, which is still the world’s most important trading currency. The other was that the countries that have huge trade surpluses--West Germany and Japan--should take measures to hold down their interest rates and to speed up their economies.
The U.S. budget deficit has been falling, but not quickly enough to satisfy nervous money men. The West Germans, for their part, have strongly resisted the idea of pumping up their economy. In fact, they actually increased interest rates shortly before the crash.
U.S. Secretary of the Treasury James A. Baker III has taken a lot of heat for his criticism of the West German action as well as for his public suggestion that Washington was prepared to see the dollar float lower rather than raise interest rates in order to compete for deposits. In Western Europe his statement was widely blamed for setting off the stock market panic.
Up to a point, the criticism was justified. People in his position must be very careful about their public statements. On substance, however, Baker was on the mark.
The West German economy is growing at a rate of only 1.4%. Inflation is negligible, and by German standards unemployment is high. Clearly the economy could absorb some expansion without overheating. However, West Germans as a people still bear psychological scars from the runaway inflation that wracked the country in the 1920s. They shrink from doing anything that is conceivably inflationary.
Pressure on Bonn to rise above these historically rooted fears is coming not only from Washington but from London and Paris as well. West German President Richard von Weizsaecker, who enjoys considerable moral authority, performed a notable service the other day when he bluntly observed that his country has a responsibility to help cope with the realities of an economically interdependent world by adopting a “suitable and sensible growth policy.”
Though no decision has been made, the Bundesbank now shows signs of listening. Japan’s economic planning minister, meanwhile, says that his country is ready to take further action to boost its economy if U.S. economic growth should falter in the wake of the stock market crash.
Foreign leaders are all agreed on one thing, however: All signals are off unless the United States does its part by reducing the budget deficit through some combination of tax increases and spending cuts. The ball is in our court.
