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Sunday, May 18, 2003

An Opportunity Missed

I suppose it really was naive of me to hold out even a candle of hope for some movement towards cooperation and understanding at the G7 meeting, but even the tiniest 'soupcon' of expectation appears to have been dashed by the reality of the show. It seems that the finance ministers have chosen to remain in the realm of unreality, and hope in this way to avoid the storm. Apparently the currency issue was part of the general discussion, but not mentioned in the communique. I say apparently because that's what is said and that is all we are going to know. Even if the discusion was more wide ranging, the decision seems to have been to leave matters as they stand, for if things had been otherwise, then presumably part of the effect of any change would have been achieved by trying to use the decision to shape market participant expectations. In addition, since, for the time being, the US seem happy with the dollar decline, and the Europeans, less aware of the deflation menace, seem happy to accept the rising euro, and since the Japanese are too diplomatic to ask for something they know they won't get, then probably things are pretty much as the public version has it. I still want to know what's going to happen when the main players wake up to the fact that this won't work. On the unreality of it all, Francis Mer sums it up: 'the worst is now behind us'. I would hope that he is right, but I find it difficult.

Bereft of a quick fix to ward off recession, the world's leading finance ministers on Saturday voiced confidence in stronger growth and committed to deep-seated reforms for rich and poor regions as the remedy. Meeting for the first time since the end of the war in Iraq, ministers from the Group of Seven powers and Russia discussed but broke little ground on debt relief, terror funds, financial stability and links with the developing world, in preparation for a summit of heads of state in two weeks time in Evian. Despite fears of imminent recession in many G7 countries, concerns about Japanese-style deflation spreading across the globe and the recent slide in the U.S. dollar, ministers said that many downside risks had receded. "We're optimistic more than anything else," French Finance Minister and G7 host Francis Mer told a news conference. But U.S. Secretary John Snow was eager that all G7 nations do more to revive global growth. "Growth in the major economies is simply not what it could be," he said. "We need to do more to ensure a robust recovery." "I made clear that the United States expects others to take bold actions themselves -- including fundamental structural reforms where necessary -- to spur growth, create jobs and contribute to global prosperity," Snow said. Currency markets -- where the dollar has fallen to near four-year lows against the euro and two-year lows against the yen -- were not mentioned in the communique and this is expected to be noted by markets wary of G7 displeasure over recent moves. The meeting, which did not include central bank governors, did not dwell on exchange rate levels, but ministers took note of recent market volatility and the fall in the dollar. "It was acknowledged that an adjustment in the dollar exchange rate had been anticipated," Canada's finance minister, John Manley said, adding that recent moves in the dollar were more rapid than anticipated. Mer said currencies were part of the general discussion and there was a standing agreement to closely monitor and cooperate if foreign exchange rates moved out of line with fundamental economic trends -- a phrase often used by G7.

The statement at the end of the two-day gathering on Saturday provided a "to do" list of ongoing reforms for each country to pursue in order to create a better environment for the private sector to lead economic recovery. The G7 said there was optimism economies would improve soon without the need for any emergency action and officials told reporters there was some hope business and consumer confidence would improve following the end of the war in Iraq. Mer said recent dire first-quarter growth figures from at least three of the G7 focussed too much on the past."The indicators which are in the red tell you only about the past. You don't drive a car solely looking in the rear mirror." Mer, who said earlier in the week the ECB had room to cut interest rates, said the G7 agreed inflation was largely behind them -- a comment only a week after the U.S. Federal Reserve said it was worried about an "unwelcome substantial fall in inflation," raising concern that deflation could threaten. The G7 countries -- the United States, Canada, Japan, Italy, Britain, Germany and host France -- said dangers to global growth and prosperity were receding but challenges remained. The statement said: "We are strengthening our commitments to structural reforms and sound macroeconomic policies." Britain's finance minister, Gordon Brown, struck a more positive note and said he saw more grounds for optimism in stabilising oil prices, rising stock prices and governments' commitments to reform."This was the strongest statement yet at a G7 on the need for reform," added Brown, drawing encouragement from European economic plans as he returns home to a critical cabinet debate on whether the UK should join the euro. "Europe is facing up to the need for reform."
Source: Forbes

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