First Principles July/August 2006

A Confederacy Of Eunuchs

What a lousy time for the leaders of the world’s economic powerhouses to be gripped by political weakness

Tony Blair is about as unpopular in Britain as Bush is here, and for much the same reason (Iraq). His Labour Party used to do what he told it to. No longer; it squirms to be rid of the man. His successor, Gordon Brown, has been all but anointed.

Stephen Harper, meanwhile, leads the weakest minority government Canada has ever seen; his party commanded barely a third of the votes cast in this year’s election. Germany’s Angela Merkel commands an even more unruly left-right coalition. Jacques Chirac’s government has just capitulated to rioters and withdrawn a comically timid first effort at reform of France’s labor rules. Winding up the parade of ineffectuality, in Italy, is Romano Prodi, who scraped out a disputed victory in April’s election and will lead a coalition of mainstream leftists, communists, ex-communists, and assorted radicals. His tainted predecessor, Silvio Berlusconi, is rarely right about anything, but is probably correct in his assessment of the Prodi government’s prospects: “I think theirs will be a parenthesis, an interruption.”

So there you have the cast for Saint Petersburg. Aside from Putin, who looks ever more like an autocrat, and with apologies to Merkel for the metaphor, the G-8 is a confederacy of political eunuchs.

All of the governments involved understand the argument for coordinated action. The imbalances have been created at least partly by a mismatch of policies—notably, the overborrowing by America’s government, China’s increasingly irrational zeal to maintain an overly competitive currency, and the failure in so much of Europe to undertake the economic reforms (such as the intended loosening of labor rules in France) that would lower unemployment and spur growth.

The changes in policy needed to restore international balance are desirable for domestic reasons, in any case. Federal overborrowing would hurt Americans in the end even if the international imbalances were not getting out of hand; a stronger renminbi would help American exports, but it would be good for China’s consumers too; Europe, presumably, would prefer lower unemployment and faster growth.

But since these issues are internationally linked, and at the moment to an unusual degree, there is an unusually sweet opportunity to devise an approach that recognizes and exploits the connections. For instance, a smaller American budget deficit would reduce demand in the economy. This contractionary effect could be offset by a coordinated rise in China’s currency and pro-growth economic reform in Europe.

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