G-7: Global Markets, Global Warming

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There was a lot of talk, but not much action at the Group of Seven (G-7) meeting in Tokyo on Saturday, where finance ministers and central bank governors discussed how to minimize what U.S. Secretary of the Treasury Henry Paulson, Jr., referred to as the "spillover of capital markets to the modern global economy" — that is, the global turmoil that has built up in markets since last August.

Top finance chiefs talked about the U.S. housing market, rising energy prices, financial-sector reform, credit problems, inflation and exchange rates. But rather than resulting in specific measures, the meeting produced a kind of watch-and-wait strategy whereby the G-7 nations, Britain, Canada, France, Germany, Italy, Japan and the United States, would "continue to take appropriate actions, individually and collectively, in order to secure stability and growth in our economies," according to their statement.

Translation: The G-7 chiefs are looking at the same economic horizon but from different vantage points, given the unique economic circumstances in each of their countries. The hope for a concerted effort by banks to lower interest rates in Europe and Japan, for example, simply won't happen. "The fact is that the European Central Bank faces inflation risk and the Bank of Japan won't move either way," says Kenichi Kawasaki, Lehman Brothers' chief economist for Japan, last Thursday.

"It's not that we had discord amongst ourselves, we just noticed differences respective to each of our economic situations...and the degree of impact," said Japanese finance minister Fukushiro Nukaga, who co-chaired the G-7 meeting with Bank of Japan governor Toshihiko Fukui. "But we're here to work in partnership to overcome this difficulty." The U.S. was "taking on the central role" Nukaga said, adding that "each country will do what they can, respectively."

There was, however, at least one specific point of agreement: the importance of the joint-initiative of Japan, Britain and the U.S. to start a climate-change fund in cooperation with the World Bank. "There's clearly a role for a fund aimed and focused at technology and technology adoption in developing markets," says Paulson. "We have no chance of solving this problem unless we accelerate the use of clean technology and come up with incentives for the private sector." Japan hopes to take the lead in climate change when it hosts the Group of Eight summit in Hokkaido at the lakeside resort of Toyako in early July.

In the short term, the financial chiefs see slow growth. They are keen to increase transparency and various form of disclosure in the financial sector, encourage appreciation of the yuan, and also encourage OPEC nations to raise production. In the long term, the G-7 economies seem more optimistic, but their statement points out that the U.S. will face further deterioration of its housing market. Asked his view of a potential U.S. recession, Paulson answered: "I've been careful to say I believe we're going to continue to grow," said Paulson. "If you're growing, you're not in a recession, right? We all know that." On Friday, Paulson ushered through a $168 billion stimulus package that he says will send checks to 130 million people in the U.S. by the end of summer and add "seven-tenths of a percent to GDP, more or less."

At their last meeting in October, the G-7 ministers asked the Financial Stability Forum to evaluate the causes of the current global economic situation; the interim report, released on Saturday, offered some direction to financial institutions, but the full report is not expected until April.