As the G7 Gathering Goes, so May Go the U.S. Economy

In moves that speak volumes about the times we live in, President Bush this week will try to boost the U.S. economy by applying pressure in Munich, Germany.

Bush will demand that Germany lower interest rates to revive not only its own economy but those of the 11 other nations in the European Community. Japan has already pledged to increase public spending to revive its domestic economy, but Bush may push Japan to pump big money into Russia--perhaps arranging a deal in which Russia will hand back Japanese islands captured in World War II.

Above all, Bush’s mission at the Group of Seven meeting of world leaders opening this weekend will be to spur business around the world in hopes of averting a relapse of the U.S. economy back home, where once again unemployment is rising and growth is slowing. The outlook for the economy this summer and fall--growth of 1.7% or less--is bleak enough, sources in Washington say, that Bush is threatened with unemployment himself after the November election.

In former times, a President faced with such a threat would simply turn up spending on public works, create jobs and ensure reelection. But the world has changed. Bush doesn’t have the option of increasing public spending while the federal deficit is running at $400 billion a year.

So he’s pinning his hopes on the G7 economic summit, the annual gathering at which presidents and prime ministers of the United States, Japan, Germany, France, Britain, Italy and Canada--the seven largest industrial nations--try to coordinate economic policy.

G7 summits, which go back to 1973, have always been obscure events for most people. Though they have set financial policies that influence the lives of millions, they have done so without the pomp and drama of the U.S.-Soviet superpower summits that negotiated over military power and arms reduction.

Now, however, the Cold War is over, the Soviet Union has split into 15 independent states and the G7 summit has become the most important regular meeting of world leaders--especially this year.

With world economies in the post-Cold War doldrums, decisions reached in Munich will mean more than usual for the economic outlook in the year ahead. Also--a thought for the Fourth of July weekend--the Munich summit will reveal much about the place of the United States in a changed world.

So here’s a list of things to watch and listen for, amid the jargon of official communiques:

* Watch German interest rates. At about 11%, they are high because the Bundesbank--the equivalent of the U.S. Federal Reserve--is trying to restrain inflation, which is rising because the German government is pumping $100 billion a year into the former East Germany.

But the result has been to throttle not only the German economy, but also the economies of Britain, France and all the other EC nations, which peg their currencies to the deutschemark and so must keep their own interest rates high.

That in turn hurts the U.S. economy because Europe is a big customer for our exports. Thus, the policy of a central bank in Frankfurt can hurt farmers in Ames, Iowa, and factory workers in Peoria, Ill. And that’s why Bush--who can point to this week’s action by the Fed to bring down U.S. interest rates--will insist on quick action to bring down German rates.

“Nothing will be said officially in Munich,” explains Kenneth McCarthy, head of Economic Intelligence Co., a New York-based firm advising corporations on currencies. “But watch for the deutschemark to weaken this summer, indicating that German interest rates are about to come down in response to Bush’s demands.”

* Watch Japan’s money. Japan will spend $50 billion on public works in its domestic economy, creating business around Asia and some pickup in sales for U.S. firms. Also, watch for other nations to demand a rise in the yen, as a step to persuade Japan to change its emphasis on aggressive exports.

* Most fascinating of all, watch for a Japanese government agreement to give Russia as much as $10 billion, and for Russian agreement to return to Japan the four Kuril Islands north of Hokkaido that the Soviet Union seized at the end of World War II. Many obstacles stand in the way of such a deal--but it would happen, say experts, if the United States made it a priority.

If not, the Kurils’ return will await another day. But Russia will get aid in any case from the Munich summit--which President Boris Yeltsin will visit. Nobody wants the economies of the old Soviet Union to collapse and renew a military threat to the world.

For three years, there has been rejoicing in the aftermath of the Cold War, but the Munich summit--in its concern for former Soviet provinces and for the U.S. economy--will present a more realistic picture. It is of an interdependent world struggling through a time that is understandably difficult.

The United States no longer has the surplus wealth to aid Russia. So it calls on Japan, which has built up a surplus largely because of access to thriving U.S. markets. But when the U.S. market doesn’t thrive, Japan too slips toward recession--as it has lately.

Germany, not surprisingly, is strained by funneling 5.5% of its annual gross national product into the eastern provinces. Germany may give its EC partners a lift, but expectations of a booming unified Europe ’92 have been postponed.

The United States is similarly strained, trying to transform 5.4% of its gross national product from military spending to peacetime industry, even as a bloated public debt limits its flexibility.

For all that, the G7 summit undoubtedly will conclude with declarations of confidence and pledges of growth. And the economies of Europe and Japan may well start to pick up. But how much the U.S. economy will benefit this summer and fall is unpredictable--like the election itself.