The Summit won't solve world economic problems


The Decline of American Influence. Much of the global economy is in disrepair as the leaders of the seven largest industrial nations convene in London this week. But despite the pomp and posturing, a summit meeting cannot solve such critical problems as rising European unemployment or the escalating cost of German unification that has put upward pressure on world interest rates. The gathering also cannot provide Soviet President Mikhail Gorbachev with the massive aid he needs to modernize his country's decimated economy. George Bush could be fairly upbeat as he jetted across the Atlantic, however. Even though the U.S. unemployment rate recently hit 7 percent, most analysts believe that America's recession is over. Factory orders jumped 2.9 percent in May, for example, while consumer spending rose 1.1 percent during the same period. Thirty years ago, when America accounted for 40 percent of the world's economy, a rebound in the United States spurred global recovery; but with America's share of worldwide output down to 23 percent today, the United States has less impact on increasingly independent industrial nations, which must cope with their own individual economic problems.

The United States has lost some economic influence around the world, but it still has clout. After months of American jawboning, Japan's central bank recently reduced its discount rate by half a percentage point. The rate cut may help the Japanese avoid criticism in London and could boost growth in parts of the world. Some analysts believe that the Japanese economy, which grew at a torrid 11.2 percent annual rate in the first quarter, will slow to a 4 percent clip later in 1991. But compared with the problems that other industrial nations face, Japan has little to worry about.

Rising Unemployment in Great Britain. Take the case of Britain. For most of Margaret Thatcher's 12-year rule, the United Kingdom tried to control inflation; as a result, it was forced to endure double-digit unemployment at times. By the late 1980s, British policy makers believed that the years of suffering, coupled with Thatcher's conservative agenda, had finally curbed their economy's inflationary tendencies. But when a boom drove unemployment down to 5.4 percent in early 1990, inflation soared to 7.4 percent by the second half of the year. The Bank of England had no choice but to raise interest rates. This monetary move has pushed up joblessness. Over the past year, the unemployment rate in the U.K. has jumped to 7.9 percent. And nearly 10 percent of the British labor force could be out of work 12 months from now.

High interest rates have also battered the Canadian economy. The Bank of Canada, which is the equivalent of America's Federal Reserve Board, tightened credit in an effort to achieve zero inflation. This rate hike pulled up the value of the Canadian dollar and priced many domestic manufacturers out of the U.S. market, which absorbs 70 percent of Canada's exports. The resulting recession in Canada started earlier and plunged deeper than the downturn in America.

Paying the Price for German Unification. While the recessions in Canada and Britain are home-grown, France's economic plight is directly related to Germany's tight monetary policy. Over the past nine years, France bolstered the franc, and by 1990 it had also achieved lower inflation than Germany. All indicators pointed toward stable economic growth. Then came Germany's unification, which has pushed that country's budget deep into the red and forced its central bank to combat inflation by squeezing credit. Since 1988, German interest rates have risen from 4.3 percent to 9 percent. France's problem is that its monetary policy is tied to Germany's. So, even though it does not share Germany's price pressures, it must share Germany's tight money.

Unfortunately, a summit meeting can't address all the economic difficulties that the industrial powers face. That's because most of the problems today are national -- not global. Despite rhetoric to the contrary, the world is not yet completely borderless. And even with integrated financial markets and expanded international trade, most of the economic booms and busts still remain out of sync with one another.

Foreign job jitters

The impact of recession has been less severe in the U.S. than in other industrial nations.

Unemployment rate


1988 5.5 pct. 10.0 pct. 7.8 pct. 8.2 pct.

1989 5.3 pct. 9.4 pct. 7.5 pct. 6.2 pct.

1990 5.5 pct. 9.0 pct. 8.1 pct. 5.5 pct.

1991 6.7 pct. 9.4 pct. 10.1 pct. 8.2 pct.

British price problems

Britain's loose monetary policy in the late 1980's pushed its inflation rate above those in France and the United States.

Inflation rate


1988 3.3 pct. 2.9 pct 6.7 pct.

1989 4.1 pct. 3.2 pct. 6.9 pct.

1990 4.1 pct. 2.7 pct. 6.1 pct.

1991 4.0 pct. 2.9 pct. 6.7 pct.

German budget blues

Germany's expanding budget deficit has put pressure on world interest rates and slowed growth in Europe.

German budget balance, percentage of GDP

1987 -1.9 pct.

1988 -2.1 pct.

1989 0.2 pct.

1990 -2.1 pct.

1991 -5.2 pct.

Originally published, 7.22.91