The G7 and Economic Policy Coordination

Although the summit meetings are formally devoted primarily to economic matters (a view strongly held by France), communications between the finance ministers and deputies are already very good and there is not a lot left for the Heads to do at the summit on economic and financial matters. The 1978 Bonn summit declaration, which embraced the locomotive theory and has been cited as an example of the G7 agreeing on specific and interdependent national commitments to achieve a common goal, was really the product of former finance ministers (Callaghan, Giscard d'Estaing and Schmidt) who thought they could practice their former trade, even though their efforts simply contributed to the boost in inflation caused by the second oil shock in 1979). It should be noted that Central Bank governors do not attend the summit although they do attend the meetings of the finance ministers at the time of the IMF/IBRD spring and autumn meetings, along with the seven deputies (usually the deputy finance ministers).

The engine room of the G7 process -- as distinct from the annual summit event -- are the regular meetings of the G7 deputies, six or seven times a year. Finance ministers and central bank governors get together at IMF interim committee meetings which are useful for familiarisation but not suitable for taking decisions. (It is noteworthy that the G7 finance ministers did not issue a communiqué after their 1993 Washington meeting, and indicated to the Heads at Tokyo that they too were striving to make their meetings more substantive and informal.)(3) There are substantive discussions among the deputies, but G7 finance deputies have so many other tasks that international surveillance is compressed into part of the meetings.

Discussions of the world economic situation at the G7 finance ministers' meetings have generally proved to be disappointing, in the view of one observer (4). Some have suggested making the IMF a regular rather than an intermittent and partial participant, and even act as a secretariat for the G7 finance ministers, but one British official thought that this would be undesirable for the IMF: "This would be a mistake for a global institution to get too close to a group of countries, even if that group of countries accounts for over half of world purchasing power."(5) There is some support among journalists and academics in the UK for the idea of having the central bankers play a greater role because they have a distinctive analytical and monetary role, whereas the finance ministers have to take account of political realities and negotiating positions as well. This enhanced role for central bankers would also aid policy coordination, which is largely in monetary rather than fiscal matters because of the external linkages.

At one time it was thought that the G7 could be a surrogate manager of the international monetary system and in the 1980s select indicators were used to try and assess the impact of policy coordination. But it has proved impossible to develop robust guidelines beyond the more general principle that stability is the best basis for long-term growth. The finance ministers do, however, provide a mutual support system for containing budget deficits.

The G7 may be a victim of its own early success - the Louvre and Plaza Accords. "These may have exaggerated expectations and if they did work it was a case of beginner's luck", as one British official remarked(6). A collective coordinated policy response is simply not possible in the 1990s, partly because the major participants do not share a common model of the world economy and their place in it. It is not possible to use economic policy coordination for more than understanding each other's perceptions and models. There is little dissent in Britain from the view expressed by Jim Rollo, in his valedictory lecture at Chatham House in 1993:

The best international policy co-ordination is prudent, credible domestic policy focused on low inflation and sustainable fiscal policy. What role then for the G-7 process? Well perhaps what it has always been - information exchange, monitoring, peer group pressure and management of market failures. The successes of this process - and here I really mean the work of finance ministers and central bankers - have been managing the debt crisis, managing the end of the dollar overshoot, activating Western aid to Eastern Europe and the former Soviet Union. One day we may come back to a rules based system but only if the world economy becomes more integrated.(7)

The G7 would be unlikely to achieve anything if it was rules-based. It needs, in the UK view (both in Whitehall and outside), to be modest and keep expectations low.

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Source: The International Spectator, 29, No. 2 (April/June 1994), Special Issue, pp. 141-159. Copyright ©, Istituto Affari Internazionali. Reproduced by permission of the author and Istituto Affari Internazionali.