World Markets Seem Adrift, With No One at the Helm
With international financial markets in turmoil and the risk of a global slump mounting, where is the world’s economic leadership?
Mostly out of sight.
Finance ministers of the United States and its major economic allies--the so-called Group of 7, created to deal with such emergencies--have remained conspicuously silent, rejecting calls for an emergency meeting. “There is no such meeting,” U.S. Treasury Secretary Robert E. Rubin told reporters Thursday.
The International Monetary Fund, whose job is to keep the world economy on track, has yet to take any lead, contenting itself with sponsoring a low-key seminar of Latin American economic officials on Thursday, even as key Latin credit ratings were being downgraded and markets tumbled again.
The Clinton administration also seems to be keeping its head down. Rubin, just back from vacation, has confined himself to a few cameo appearances to pronounce the U.S. economy fundamentally “sound.”
Rubin is scheduled to meet with Japanese Finance Minister Kiichi Miyazawa late today in San Francisco. But while President Clinton has called the session “profoundly important,” U.S. officials have been warning that “we’re not expecting any dramatic results.”
Critics are growing increasingly concerned about the deafening silence.
“You just get the idea that there’s nobody home,” says David C. Mulford, a former U.S. official who was instrumental in engineering a 1985 pact that sparked a decline in the then-overvalued dollar.
“This is the dog that didn’t bark in the night,” says Gordon Adams, deputy director of the International Institute for Strategic Studies in London. “This is exactly the kind of situation where you’d expect them [the G-7 finance ministers] to step in.”
While some question just what the G-7 could do, there is no dearth of suggestions.
Private analysts have proposed everything from a coordinated interest-rate cut--in which all the major industrial nations except Japan would slash their interest rates at once--to extra trade financing for hard-hit Asian economies.
Proponents envision a series of trade-offs by the G-7 under which Japan would speed up its economic stimulus and banking-overhaul measures in exchange for the interest-rate cut by the others. The G-7 also could offer Russia billions in loans if it enacts reforms.
Some also say the industrial countries should use such a forum to direct the IMF to be more flexible in prescribing cures for hard-hit developing countries. The IMF, in this view, should rely less heavily on spending cuts and tax hikes, which too often help push countries into deeper downturns.
Finally, some analysts suggest that the industrial powers also draw a rhetorical line in the sand, serving notice that they will protect regions, such as Latin America, that have made painful reforms of their own but are being battered anyway by rogue financial markets.
“If they really believe that all we have to fear is fear itself, then they ought to stand up and tell us that,” says Alan Stoga, strategist at Zemi Investments, a Wall Street firm. “The markets are sensing it; their absence is beginning to have consequences.”
While assembling such packages would not be easy, the major industrial countries, led by the United States, put together similar grand bargains in the late 1970s and 1980s to deal with international financial problems and carried them off reasonably well.
Perhaps the best-known example is the 1985 Plaza Accord. Meeting in New York’s Plaza Hotel, the G-7, at the instigation of the United States, engineered a spectacular decline in the value of the dollar, which eventually arrested the growing U.S. trade deficit and eased protectionist pressures here.
To be sure, despite the critics’ fervor, leaders like Federal Reserve Board Chairman Alan Greenspan believe the recent collapse in U.S. stocks was necessary and overdue. Anyway, there is no easy fix for today’s economic turmoil.
Japan favors cutting interest rates to stimulate the global economy, but few other countries subscribe to that view. Federal Reserve Board officials, for example, have indicated that despite the global economic slump, they still worry about economic overheating here at home.
The Fed is painfully aware of what happened after the 1987 stock market crash, when it cut interest rates to help stem the slide in stock prices. The result: Inflation got out of hand, triggering a recession in 1990 and 1991.
Many authorities remain unconvinced that an interest-rate cut here would do any good. Long-term interest rates have already fallen as capital has poured into the United States, and the U.S. economy still has a lot of momentum.
Gregory B. Fager, economist at the Institute of International Finance, argues that a little waiting on the part of policymakers may not be so bad, if only to make sure where things are headed before they act.
“These kinds of corrections have to play themselves out,” Fager said of the stock markets’ recent gyrations. “What exactly could we ask the Group of Seven to do now? I’m not sure it’s all that clear.”
A second problem is that in the case of the two big problem economies now provoking the market turmoil, Japan and Russia, outside measures cannot do very much. Success depends almost entirely on their governments’ fixing their own economies, and both governments face strong pressure from voters and special-interest groups against rapid reforms.
Even if there were a consensus, critics say the machinery of the G-7 has languished in recent years. Although the finance ministers have met regularly, there has been little real attempt to thrash out international solutions to specific economic problems, says Mulford, now with Credit Suisse First Boston Ltd.
Zemi’s Alan Stoga called the group’s last few years’ discussions “a sort of loosey-goosey international talkfest--nothing more.” He also points to other snags: Congress has refused to approve added funding for the IMF and has restricted the use of U.S. emergency rescue funds--leaving the administration and the IMF with fewer resources.
To top it all off, most of the G-7 governments (Britain, Canada, France, Germany, Italy, Japan and the United States) are paralyzed politically.
German Chancellor Helmut Kohl is preoccupied with a reelection campaign. Japan is stymied by opposition to its economic stimulus package. The French and Italians seem indifferent. And Clinton’s presidency has been weakened by the Monica S. Lewinsky affair.
Meanwhile, the sense of urgency is mounting. Allen Sinai, chief economist at Primark Decision Economics Inc., warns that while a global recession is not a certainty yet, the risks are growing. “Wherever we end, it will be a crawl rather than a leap back.”
* GLOBAL DECLINE: U.S. markets fell as concern about slowing economies sent shares plunging globally. D1
