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Canada, Europe and the Economic Summits

Sylvia Ostry

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The first four summits, of 1975-78, attempted to stake out an agenda of policy co-ordination geared to promoting economic recovery from the serious disorder engendered by the first OPEC shock and the break-up of the Bretton Woods system of fixed exchange rates. The climax of this ambitious effort was the first Bonn summit of 1978. The Americans engineered a complex package of coordination involving specific commitments of individual countries in both energy policy and macro policy. Unfortunately the second OPEC shock followed, and the 1978 Bonn package was, rightly or wrongly, criticized as contributing to the inflation and current account imbalances of the early 1980's. Ironically, the most ambitious attempt at policy coordination in the history of summitry became a major impediment (especially in Bonn) to further efforts in this direction in the 1980's.

The early summits of the 1980's were dominated by the second oil shock and the initial policy response to it, and then by the Reagan or "dollar shock" and the emergence of the striking asymmetry in the world economy among the three major blocs, the U.S., Europe and Japan. These developments formed the economic backdrop to Bonn Two in 1985, another turning point in the message of summitry.

The policy response to the second oil shock of 1979-80 was unlike that of the first -- synchronized and targeted solely at fighting inflation. Monetary policy became a central instrument of control, most visibly in the U.S., with the appointment of Paul Volcker in 1979. But the cumulative effects of a prolonged period of unprecedented monetary tightness, pursued simultaneously in major industrialized countries, were not well understood. Certainly the impact on the LDC debt position of rising interest rates, a rising dollar and plummeting commodity prices, was not factored into the "planning equation".

The rebound from the severe 1982 recession was initiated by the strongly expansionary fiscal policy of the Reagan Administration launched in a vision of supply-side euphoria, and by an easing of monetary policy in the U.S. provoked by the eruption of the debt crisis in August of 1982. In the rest of the OECD, the prime forces shaping the recovery were weak, consisting primarily of the disinflationary process itself. This contrast between the U.S. and other major countries was sharpened by a continuing and marked tightening of fiscal policy, especially in Germany and Japan, throughout the first half of the decade.

The strikingly divergent growth pattern which resulted from the differing recovery impulses produced a number of serious imbalances. Most dramatic were the sharply contrasting current account positions of the U.S., Japan and Germany. The stunning appreciation of the dollar and the resulting loss of competitiveness of U.S. exports added powerfully to the protectionist fury in Congress.

It was these gross imbalances in the international economy and the strains they induced -- rising protectionist pressures in the U.S., the systemic threat of the global debt problem and growing fear of an exchange rate crisis -- that confronted the heads of government in May 1985 in Bonn. What was needed was signal, such as the launching of a new GATT Round, to halt the increasingly serious erosion of the multilateral trading system.

In the event, the most significant outcome of Bonn was a declaration by each country of its own economic strategy and objectives. These were strikingly similar: reducing structural rigidities and maintaining prudent fiscal and monetary policies. The Economist called it the "Ronald Thatcher Message".

But Ronald Thatcherism had a deeper implication. The Bonn Two message of summitry -- getting one's own house in order -- was the recipe for international economic cooperation which had dominated summitry since the onset of the 1980's. It implied "hands off" or laissez-faire both domestically and internationally.

However on the way to the next summit at Tokyo an important change took place in Washington: the move to the Treasury portfolio of Jim Baker. Once again, the message of summitry changed. The events of 1985 which led to the Tokyo Summit of 1986 - the Plaza Accord which began the process of managed floating and the Baker Plan which laid out a new approach to global debt -- were not only important in themselves but also because they signalled a reassertion of U.S. world economic leadership. This did not stem from a coherent vision of the need for or desirability of a basic regime change. It was "creative ad hocery" which governed the Tokyo Summit.

The Tokyo Summit did two things. It delineated the key forum for policy cooperation or multilateral surveillance -- the G-7 Finance Ministers -- and began to spell out the means by which such a process might be achieved through evaluating the desired performance of individual countries by means of specific indicators, including exchange rates. It was suggested that a country that deviated too far from the desired course would be subject to peer pressure to adopt "remedial" measures to alter its economic policies.

Finally, the Tokyo Summit achieved a major breakthrough in another crucial area of international cooperation, trade policy. After a bitter debate in Bonn which had revealed the depth of conflict within the G7 over agricultural trade, the leaders at Tokyo gave a strong push towards the launch of a new Round of multilateral trade negotiations and gave prominence to the central role of agriculture in that Round for the first time in the history of the GATT. Building on this summit push, the Uruguay Round was launched in September 1986 in Punta del Este.

But the big news event after Tokyo was not Punta but the Louvre Accord.

With the benefit of hindsight, the Louvre Accord of February 1987, which sought to give further substance to the policy cooperation process launched at Tokyo, was not the beginning of this process but the beginning of the end. While the communiqué spelled out policy measures which governments would undertake to reduce the external imbalances, these measures were tiresomely familiar to the media and therefore not "news". Attention focused almost exclusively on the communiqué language in which the G-7 agreed "to cooperate closely to foster stability of exchange rates around current levels". The media turned out to be right in their assessment that the chief focus of cooperation was to be exchange rate stability and the chief instruments coordinated intervention and monetary policy. Indeed, as we shall see, even those forms of cooperation were abandoned by the G-7 in their meeting in April 1990.

The Venice Summit in 1987 was acerbically captioned by The Economist "Deathly in Venice". A bit harsh, perhaps, since there were some tentative proposals on sub-Saharan African debt, later locked up in Toronto in 1988. (The Toronto Summit also emphasized the importance of micro policy, including trade policy, and thus launched the process of micro-policy surveillance at the OECD.)

But the absence of advance on economic policy cooperation in Venice was followed by the October 1987 crash of Black Monday. The tenuous credibility of the G-7 process had been underlined by the public row between the U.S. and Germany over their alleged respective inability to live up to their oft-repeated policy commitments. Black Monday illustrated the principle of shock therapy. The U.S. and German fiscal policy changes and the coordinated monetary policy actions of central banks which followed the crash represented attempts to restore market confidence and sustain growth.

By the Paris Summit of 1989, economic policy cooperation had become a decidedly minor item on the Summit agenda. It was no longer a priority concern of the Heads of Government but the mandate of their Finance Ministers whose meeting in Paris in April, at a time of growing concern about the weakness of the yen, significantly excluded any policy action. In a weary echo of past communiqués the G-7 Finance Ministers statement noted that: They reaffirmed their commitment to economic policy coordination, including cooperation in exchange markets". The markets and the media shrugged off the non-event. A leader in the Financial Times was, on the contrary, quite enthusiastic: "A usefully humdrum meeting in Paris . A growing number of economists, opposed to international policy coordination, especially of the Louvre exchange-rate category, echoed this sentiment. Indeed, for many, Louvre was the Bonn package of the 1980's -- an example of what not to do.

The Paris Summit of 1989 was the fifteenth, the onset of the third cycle since the Giscard-Schmidt launch. It has been described by a French journalist as a superb example of "political hollywoodism", coinciding as it did with the bicentenary of the French Revolution and the beginning of the demise of the Soviet empire. The communiqué was heavily oriented to environmental issues, long on rhetoric but short on action. The communiqué also recognized the differing policy priorities of each of the countries along the lines of Bonn One: get your own house in order and the international economy will take care of itself. There was no reference to currency stability as an objective.

But a very important decision was made in Paris, albeit accidentally. The European Commission was assigned the role of coordinating Western assistance efforts in the reform of Eastern Europe. This, of course, simply validated the increasingly important role of the E.C. and the Commission, but was significant nonetheless because of the agreement of the Americans in the Summit context.

The first summit of the 1990's, in Houston, reinforced the post Louvre message. The 1980's focus on international economic issues, exemplified by the concern over current account imbalances and exchange rates, had faded. The U.S. current account deficit had been somewhat reduced and was, in any case, deemed sustainable in a world of vastly increased capital flows. One economic issue, the rise of protectionism, especially as exemplified by U.S. unilateralism, was indeed worrisome. But the one possibly effective antidote -- the successful conclusion of the Uruguay Round -- was highly contentious because of the unresolved conflict between the U.S. and the E.C. over agriculture. Despite brave efforts at creatively ambiguous communiqué language, this effort at international economic cooperation at Houston produced no real change in bargaining positions.

The major focus of Houston was on the issue of Soviet and East European reform. Judging from Paris and Houston, the summit may be evolving into a forum for Heads of Government to discuss the big political issues of the day. Even in these, however, the prevailing view of summitry is laissez-faire. Thus, on Soviet aid, some wanted to contribute and some didn't. A patched-up agreement on the environment reflected the same spirit.

One wonders what would have happened at Houston if Saddam Hussein had decided to invade Kuwait a month earlier. But that opens up another whole story and, thank goodness, goes beyond the topic assigned me!

Source: Presented at the All-European Canadian Studies Conference, The Hague, 24-27 October, 1990. Unpublished. Reproduced by permission of Dr. Sylvia Ostry.

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