Should G7 policy coordination be revived?

• Author: Bergsten, C. Fred

1. Absolutely! Now more than ever.

   BY C. FRED BERGSTEN Director, Institute for International Economics

   There are three reasons why the G7 should launch a major new effort to coordinate their economic policies, especially over the next year as the United States assumes the chair for next year's summit and associated meetings. First, the world economy stands at a crucial crossroads. There are strong positive signs of recovery in the United States and the beginnings of pickups in Europe and Japan. However, the outcome remains uncertain and needs policy reinforcement. Moreover, the sustainability of the U.S. expansion is unclear, in particular whether private investment will achieve the needed acceleration.

   Second, global growth needs to proceed on a much more balanced geographical basis, The U.S. trade and current account deficits are approaching $600 billion and have risen by almost one full percent of GDP in five of the last six years. The net foreign debt of the United States now approaches $3 trillion and is growing by 20-25 percent per year. The situation is clearly on an unsustainable trajectory. The dollar will have to fall considerably further to restore n sustainable equilibrium in the United States and world economies if it remains the primary tool of adjustment. The adverse impact on other countries' economies could be severe, especially in Europe, where the euro has already shouldered most of the counterpart appreciation.

   The better solution by far would be a coordinated global growth strategy in which Europe and Japan adopted both the structural reforms and macroeconomic policy changes needed to achieve the much faster growth of which they are capable. The United States' external deficit could then fall as a result of increased exports to more rapidly growing trading partners, rather than through a further, perhaps precipitous, decline of the dollar.

   The third reason for pursuing G7 policy coordination now is to help restore overall harmony in trans-Atlantic relations. Deep scars remain from the debate over Iraq earlier this year and could flare again at almost any time. Such an agreed G7 strategy could thus strengthen the international security as well as economic outlook.

   The record of the past thirty years shows that there are four strong reasons for the main industrial countries to pursue active coordination of their economic policies, all of which obtain now. First, successful coordination improves the economic results for each individual country. Second, coordination at high political levels can facilitate tradeoffs across issue areas that would otherwise be impossible. Third, both the process and substantive results of policy coordination strengthen overall relations between the participating countries.

   Fourth, and most importantly, international coordination bargains can help political leaders in individual countries win domestic support for their economic policy initiatives. National leaders often launch constructive reform programs that encounter strung domestic opposition. But embedding those reform...