US Stimulus Policy Gains Favor With G-7
As the US rebounds from recession, top industrialized nations are looking more favorably on US economic goals
WASHINGTON — THE world's wealthiest countries, mired in recession, are looking to the relatively robust United States economy to pull them out of their doldrums. But while the US has shown strong signs of its own revival, weakness abroad could be a drag on the US recovery.
"Every projection for the world's major economies, except the US, is downward," says Guy Pfeffermann, director of the economic department at the World Bank's International Finance Corporation. The slowdown is dramatic because these countries, along with the US, account for 80 percent of the globe's goods and services.
Concerned about the course of European, Canadian, and Japanese economic policies, President Clinton has called for a meeting of the Group of Seven (G-7) leading industrialized nations.
For years, the US implored these nations to ease their monetary policies and stimulate domestic consumption. Ironically, for their own sake and not to meet US demands, both Europe's and Asia's economic leaders have been forced to do much of what Washington has urged.
Many nations that are the primary sources of foreign investment in the US and the key markets for US exports are in distress. Britain, Canada, Australia, and New Zealand suffer from protracted recessions and severe joblessness. Growth on the European continent has all but grinded to a halt. Its official unemployment numbers average 10 percent.
In Japan, asset values have plummeted, banks incur massive loan losses, and the financial markets have been rocked. Mr. Pfeffermann says Japan's excess manufacturing capacity explains its low demand for imports and redoubled efforts to export.
"US economic growth is a welcome boost, in terms of its increased demand for goods and services from overseas," says Hung Tran, managing director of Deutsche Bank Research in Frankfurt. While Japan and the West view the US as the engine of growth this year, Mr. Tran says, he projects "1994 will be a year of mutually reinforcing growth."
Forecasts aside, US Treasury Secretary Lloyd Bentsen and Federal Reserve Board chairman Alan Greenspan are eager to meet their G-7 partners - finance officials from Britain, Canada, France, Germany, Italy, and Japan - later this month in London.
The past several years of G-7 gatherings have been contentious. When the US economy slipped into slow and no-growth, Washington pressured the group to push interest rates down and government spending up in order to ensure adequate supplies of capital, a steady demand for imports, and economic growth.
Inflation-conscious Germany, whose Bundesbank (Central Bank) has dominated European monetary policy with a tight reign on rates, balked at the US requests. Japanese trade and finance ministers also scoffed at American pleas to step up imports and government spending.
Today, the situation is quite different. "Many G-7 countries are ready to do some fiscal stimulus this year," Mr. Tran says. Pfeffermann adds that "the word `sacrifice' is surfacing in political discourse" among the world's industrialized economies.
Germany is struggling to put together a fiscal package this winter, after years of Bonn's heavy borrowing to finance ongoing German unification costs, and grappling with a soaring debt that pushed interest rates higher.
With the country's high labor costs and insufficient tax base, policymakers attempt to forge a consensus among political parties, employers, and unions. Meanwhile, the Bundesbank has eased monetary policy by lowering rates.
Wary of more business failures and a weakening financial sector, Japan is anxious to shore up bank lending. Earlier this month, the Bank of Japan cut interest rates to help revive borrowing. This came after the Japanese Diet reluctantly voted for a government-stimulus package.
Japan wants to avert high unemployment and a credit squeeze that inhibits business borrowing and expansion. Tokyo officials are now pressuring private Japanese banks all over the country to increase their lending to small and medium-sized firms.
Tokyo is leaning hard on employers not to lay off workers, force them into early retirement, or break promises of jobs to new college graduates.
Given Tokyo's and Bonn's new, if self-oriented, approach toward eased monetary and fiscal policy, G-7 meetings could be more harmonious in the future. But the Clinton finance team may have as much trouble as the Bush team had in convincing the dominant Asian and European economies to open their markets and spend more on imports.
With their great need for export-led recoveries, all of America's G-7 partners are worried about a toughening US trade position. German Foreign Minister Klaus Kinkel registered his dismay during an official visit to Washington last week.
And Tokyo is not waiting until the London meeting to convey its own views to the new US administration. Japan's Foreign Minister Michio Watanabe arrived here yesterday for talks with Clinton and others. He will be soon followed by Finance Minister Toshiro Hayashi. Wary of rising US trade protectionism, Tokyo officials told their local media this week that the two ministers want the US to remember not to upset Japan, the largest market for US farm and high-technology production.