Saint Petersburg was chosen to host this year’s Group of Eight economic summit, the annual summer gathering of leaders of the United States, Canada, France, Germany, Italy, Japan, Russia, and the United Kingdom. The selection of a Russian venue was all too apt. Vladimir Putin’s government is overweening, dysfunctional, and increasingly at odds with the Bush administration. The two leaders agree on very little just now, whether it is the world economy or anything else. And though Putin would stand out if this were a straightforward bad-government competition, none of the other heads of state has much to boast about, least of all George W. Bush. Has there ever been a summit at which all of the leaders were so weak, so compromised, so unpopular, or so discredited?
Ordinarily, it wouldn’t really matter. These summits are usually just glorified photo ops, where no real business is conducted—or needs to be. But just to make it all perfect, on this occasion purposeful cooperation on economic policy is actually needed. The world economy’s chief ailment these days is the huge imbalance in trade and finance between the United States on one side, importing vastly more than it is exporting and borrowing to make up the difference; and the trade-surplus, capital-exporting countries on the other side: China, Japan, the big oil exporters, parts of the European Union.
Fluctuating imbalances of this kind are business as usual, needless to say, and no problem at all in principle. The issue now is the scale, which is unprecedented. America’s current-account deficit was $800 billion last year. Its foreign debt stands at roughly 25 percent of the gross domestic product, and it’s growing—ten years ago the figure was 6 percent. Much of the money flowing in to finance that deficit has come from China’s government, which buys U.S. Treasury bills and puts them in its central bank. Those Chinese reserves now stand at some $900 billion—by historical standards, a remarkable number.
The foreign appetite for American financial assets is not unlimited. At some point this imbalance will therefore be reduced, either by financial markets at their own initiative (which might well be abrupt and brutal) or by deliberate changes in economic policy. Because this financial imbalance is international, it would be best addressed by an internationally coordinated remedy. The shape of that remedy is uncontroversial. America needs to cut its budget deficit (which fuels its need to borrow from overseas), China needs to let its currency rise against the dollar (which would be good for American exports), and the European Union and Japan need to grow faster (which would work to the same effect).
The summit, you might think, would be the appropriate place to work it all out. Invite China along, and reach an understanding. But then all of the leaders would have to go home and deliver. China, not a member of the G-8, could probably keep any commitments it entered into (sometimes it helps to be undemocratic). But could the others?
Wherever you look, you see weak governments. With midterm elections approaching, Bush’s standing with American voters keeps testing new lows. Republicans contemplate November with mounting dread. Junichiro Koizumi should be doing well, you might think, since Japan’s long-flattened economy is finally reviving—but no, Koizumi’s Liberal Democratic Party lost a recent by-election. The prime minister is due to step down as leader of his party in September.
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.
Unfortunately, seeing a need to act and being able to act—especially in unison—are two different things. The policies required by each country must be passed by domestic legislatures and (even in China’s case) sold to domestic interests. Used intelligently, a G-8-wide or broader agreement could ease that political burden. It could tell the world, “We’re all in this together, each of us playing a part.” The imprimatur of an international resolution and the perception of foreign “concessions” can be useful crutches for political action.
The leaders who will gather in Saint Petersburg seem to understand this too. In April their finance ministers and central-bank governors agreed to a new mandate for the International Monetary Fund, asking it to study the imbalance (as if it had not already been doing so: the fund issued strong warnings about all of this four years ago) and publish recommendations for an internationally coordinated approach to resolving it.
Up to a point, this is encouraging. But the IMF has no power to force these governments to act. They are not borrowing from the IMF, unlike the small, poor, near-bankrupt countries that it is accustomed to supervising. It has no leverage except persuasion—and if it has a care for its own continued existence, it had better use even that with extreme circumspection. (What would Congress make of the IMF’s appearing to dictate American fiscal policy?)
The IMF might serve as a useful prod, but real leadership—starting with strong public statements of support and commitment—must come from the crippled heads of state in Saint Petersburg. Unfortunately, the politics of weakness often tugs in another, less productive direction—especially before a crisis actually boils over. It will be tempting for these leaders to say, “This problem is mainly China’s fault, and Europe’s fault. The IMF should force them to act.” Blaming foreigners is a time-tested political strategy. If that strategy is invoked, the IMF, the summit, or whatever mode of international cooperation is adopted may actually slow reforms further.
So here’s the key question, which the summit will at least begin to answer: After all of the political and economic calculations have been done, what do enfeebled governments really see—an opportunity to act more effectively, or just somebody else to blame?