Magazine article Modern Trader

U.S. Waits in Bullpen during Economic Policy Game

Magazine article Modern Trader

U.S. Waits in Bullpen during Economic Policy Game

Article excerpt

Election or no election, Uncle Sam is a bench sitter in the current game of international economic policy coordination.

Quite a departure from the self-proclaimed leadership position of the last few years. Only months ago the United States finally won kudos for pitching a world policy approach aimed at stimulating growth vs. fighting inflation.

Sharing the dugout bench are Canada and Japan. Both already have done their part to reduce inflation and at the same time revive their economies. This time the European nations are on the field.

September's currency crisis in Europe made it clear future economic policy coordination by the Group of Seven (G-7) industrial nations would be led by the Continent and not the United States. The U.S.-hosted G-7 meeting of finance ministers and central bank governors on Sept. 19 produced one of the shortest joint communiques in the confab's history -- three paragraphs. And one of them dealt with Russian assistance.

All the group could agree on was concern about the volatility in world financial markets and the need for restoring "stable and long-lasting exchange rate relationships." There was no evidence the officials would agree to any detailed concerted currency intervention or other actions, which only fuels the notion that the G-7 is increasingly dysfunctional.

President Bush's attempt to lead top economies toward policy convergence following the market-disturbing Sept. 20 Maastricht Treaty vote by France was snubbed and laughed at by U.S. trading partners.

And, as history would suggest, a victory by Presidential hopeful Bill Clinton would put the United States on no better than observation status at future global policy coordination meetings. The reason: It would bring a new cast of characters to the G-7 finance meetings and economic summits -- personalities most likely inexperienced in the ways of cooperation among the industrial nation elite.

Wagging fingers have pointed blame for the European currency crisis in several directions:

* at Germany, for maintaining high interest rates when neighboring nations hoped to cut rates;

* at Germany and the United States for maintaining wide interest rate differentials and divergent monetary policy paths;

* at currency speculators for hyping doubts about the viability of monetary union in Europe and triggering a bout of foreign exchange market volatility that toppled the British pound and the Italian lira.

As a result, both Great Britain and Italy were pressed to leave the European Community's exchange rate mechanism (ERM). The French franc narrowly escaped ERM exile by stealing home plate -- the security of its floor in the currency regime -- with the help of Bundesbank intervention to sell the D-mark in support of the franc. …

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