Joint Action by G-7 Can Break Old Barriers Structural Problems like Deficits, Unemployment, and Protectionism Can Best Be Addressed through International Cooperation

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THE international coordination of monetary and exchange rate policy through the G-7 has made an indispensable contribution to the industrialized world. With the economic summit of the world's seven leading industrial countries now underway in Munich, it is worth considering how the summiteers' operating brief could be expanded beyond its traditional monetary and exchange rate policy framework.

In the 1990s, the great competition between the systems of East and West has yielded to the pursuit of efficient production locations and forward-looking policies on trade, the environment, labor, energy, and competition. As each country seeks to optimize its domestic economy, the world economy - producers and consumers alike - stands to benefit.

Yet in the increasingly interdependent global economy, these processes in individual countries cannot be truly optimal unless they converge on an international level. It is apparent that structural economic issues - issues that cannot be resolved through central bank initiative alone - must now be addressed on a multilateral basis in order to maintain stability. This need is evident in the lack of clear economic direction that presently characterizes most industrial economies. The G-7, I believe, could serve as the vehicle that provides that direction.

Mustering the political will required to address the structural problems, which are generally domestic in character, can often be actively supported by multilateral action. Take, for example, the European Community (EC), where convergence pressures force governments to lower deficits, rein in inflation, and maintain orderly bond markets. The G-7 mechanism can serve a similar function on a broader scale.

One structural issue that would be on everybody's list is budget deficits. In Germany, for instance, the present budget deficit can only be addressed through the reduction of subsidies, the privatization of public enterprises, and deregulation. Understandably, all of these steps face stiff opposition from certain domestic constituencies.

In the United States, deficit reduction measures such as defense cuts and the scaling down of entitlement programs face similarly stiff opposition. It is a fact of domestic politics on both sides of the Atlantic that one or the other vested-interest group can effectively bring progress to a standstill. Coordinated policy initiatives among the G-7 on structural budget deficits may be the only effective mechanism through which real progress can be achieved. …