Economics: Self-interest rules as G7 drifts apart

IS THERE anything that can seriously be described as co-operation between the Group of Seven leading industrial countries?

The meetings of finance ministers go on, as they did yesterday in London. They do no harm. But there is little sense of the shared endeavour with which their predecessors drove down the dollar after the Plaza agreement of 1985, or indeed stabilised the US currency after their Louvre meeting in 1987.

Since 1989, the G7 nations have drifted apart, pursuing domestic objectives. The movement of their currencies has reflected those priorities. In the US, low interest rates were designed to haul the economy out of its Eighties debt trap. They had the side-effect of a declining dollar.

Japan, too, has had its own agenda. It would no doubt like a G7 consensus to encourage the recent rise of the dollar because this would help to stop the yen's surge. The Japanese currency is up by a fifth over the year - a painful shift for Japan's trading sectors, especially since the domestic economy is suffering from the falling asset prices and high debt familiar in Britain.

But there is no corresponding willingness among other G7 members to cap the Japanese currency. The yen's appreciation is the least damaging way of reducing Japan's monstrous dollars 117bn current account surplus last year, since the alternative is probably US protectionism. Japan's economic salvation lies in another and more enthusiastic fiscal package to stimulate public works.

Within Europe, the country that matters most to Japan and the US is Germany. The Germans, too, have pursued their own domestic agenda as they have tried to control the inflationary implications of reunification. The Bundesbank has liked a lower dollar because it reduces German import prices and inflationary pressures. A strongly rising dollar would make the Bundesbank more reluctant to embark on rapid cuts in interest rates.

Nor does President Clinton have any interest in a strong rebound in the US currency, since his first priority is jobs at home. The rise in the dollar eases the way into the US market for foreign producers, and will tend to redistribute some US growth and jobs to its trading partners. So any rise in the dollar will not be a matter of international agreement so much as an incidental consequence of higher US interest rates as the recovery gets under way.

France, like Britain, is no longer a key player but French interests are also split: capital flows from the German mark to the dollar weaken the mark, and make it easier to fix the franc against the German currency without a large gap in interest rates. But a weak mark may mean German interest rates are higher than they would otherwise be. The real question about France is not one for the G7, but for the European Community: will the Germans - and this means the Bundesbank, not Bonn - fight off another speculative attack on the franc?

There appears to be a touching faith in Paris and Frankfurt that this will not happen. A leading continental industrialist recently dined with senior Bundesbank council members in Frankfurt and asked how confident they were that the franc could be defended ahead of the National Assembly elections on 21 and 28 March. The reply was that they had talked to George Soros (the brilliant speculator who is said to have made more than dollars 1bn betting against the pound in September) and he had promised not to sell the franc short.

In reality, the Bundesbank can defend the link if it wants to, for the simple reason that it can print enough marks to meet any demand. But one consequence would be that German interest rates could fall sharply, at least temporarily. And the Bundesbank has not yet shown any sign that it is prepared to make such sacrifices of its domestic objectives for its international ones. There must, therefore, be a real chance that the franc-mark link will be broken.

The danger is particularly acute when the markets have a clear date on which there is a risk of a realignment, as they did in September at the time of the French referendum on Maastricht. Imagine that there is a one in 10 chance of a devaluation of 10 per cent at some point over the next year or even beyond. In other words, anybody holding that currency could lose a tenth of their capital. Investors may insist that interest rates are one percentage point higher than German mark rates - 10 per cent of 10 per cent - to compensate for the risk of a capital loss.

But if the devaluation may happen on one specific day - after the French referendum or elections - an interest rate accelerator begins to operate. A year away, one percentage point on annual interest rates is enough to offset the risk. Half a year away, the annual interest rate premium has to be double the size to offset the same risk. The day before the day arrives, the interest rate premium has to be one per cent a day - an annual rate of hundreds of per cent.

The problem for the French is that they have once again set a date beyond which there is a real risk of a franc devaluation, whatever the right-wing parties now say. The front-runner for the Finance Ministry if the centre-right parties win is Edouard Balladur. Yet it is the same Mr Balladur who promised before becoming Finance Minister in 1986 that there would be no devaluation, and who devalued soon after taking office.

Any renewed turbulence in the exchange rate mechanism may well hit the pound. Sterling appears to be in the invidious position where almost any major ruffle in the foreign exchanges is an excuse to sell. The pound will not shake off its persecutors until there is incontrovertible evidence of a recovery, and we are still in a period of mixed signals.

Last week's crop was generally encouraging. The CBI survey was the first since just after the election to show the sort of optimism about output that has traditionally signalled an upturn. The growth of cash in the economy is running ahead of the Government's target ceiling. The Central Statistical Office also slipped out an analysis in Economic Trends which admits that it has underestimated growth. The CSO says it is getting better, and it will not happen again. But I doubt it.

The bias has not been large: the CSO owns up to an average revision upwards of half a percentage point in the annual growth rate over the 10 years to 1988. This appears to come about because the CSO compares its first estimate of national output with a figure for national output a year earlier which has already been revised upwards to take account of new information. The result is to reduce measured growth.

The latest GDP figures, for example, say that output dropped by 0.1 per cent over the year to the fourth quarter. But this compares a new figure for the fourth quarter of 1992 with a figure for the fourth quarter of 1991 which has been revised upwards from 113.1 (1985=100) to 113.4. If we compare first estimate with first estimate - like with like - the economy is seen to have grown by 0.2 per cent. It is not much, but after the last few years perhaps we should be thankful for small mercies.

(Graphs omitted)

Arts & Entertainment
Madonna in her music video for 'Like A Virgin'
music... and other misheard song lyrics
News
Waitrose will be bringing in more manned tills
newsOverheard in Waitrose: documenting the chatter in 'Britain's poshest supermarket'
News
The energy drink MosKa was banned for containing a heavy dose of the popular erectile dysfunction Levitra
news
News
Much of the colleges’ land is off-limits to locals in Cambridge, with tight security
educationAnd has the Cambridge I knew turned its back on me?
VIDEO
Sport
Australia's Dylan Tombides competes for the ball with Adal Matar of Kuwait during the AFC U-22 Championship Group C match in January
sportDylan Tombides was diagnosed with testicular cancer in 2011
News
Ida Beate Loken has been living at the foot of a mountain since May
newsNorwegian gives up home comforts for a cave
Extras
indybest10 best gardening gloves
News
Russia's President Vladimir Putin gives his annual televised question-and-answer session
peopleBizarre TV claim
Arts & Entertainment
tvIt might all be getting a bit much, but this is still the some of the finest TV ever made, says Grace Dent
Arts & Entertainment
Comedian Lenny Henry is calling for more regulation to support ethnic actors on TV
tvActor and comedian leads campaign against 'lack of diversity' in British television
News
Posted at the end of March, this tweeted photo was a week off the end of their Broadway shows
people
News
peopleStar to remain in hospital for up to 27 days to get over allergic reaction
Arts & Entertainment
The Honesty Policy is a group of anonymous Muslims who believe that the community needs a space to express itself without shame or judgement
music
News
Who makes you happy?
happy listSend your nominations now for the Independent on Sunday Happy List
Life & Style
life
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

1st Line Helpdesk Engineer Apprentice

£150.00 per week: QA Apprenticeships: This company has been providing on site ...

Telesales & Sales Support Apprentice

£221.25 per week: QA Apprenticeships: This company is a well established Inter...

Client Relationship Manager - SQL, Python

£40000 - £50000 per annum: Harrington Starr: Client Relationship Manager - SQL...

**Financial Services Tax**

£35000 - £50000 per annum: Pro-Recruitment Group: Take your chance to join the...

Day In a Page

How I brokered a peace deal with Robert Mugabe: Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC

How I brokered a peace deal with Robert Mugabe

Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC
Video of British Muslims dancing to Pharrell Williams's hit Happy attacked as 'sinful'

British Muslims's Happy video attacked as 'sinful'

The four-minute clip by Honesty Policy has had more than 300,000 hits on YouTube
Church of England-raised Michael Williams describes the unexpected joys in learning about his family's Jewish faith

Michael Williams: Do as I do, not as I pray

Church of England-raised Williams describes the unexpected joys in learning about his family's Jewish faith
A History of the First World War in 100 moments: A visit to the Front Line by the Prime Minister's wife

A History of the First World War in 100 moments

A visit to the Front Line by the Prime Minister's wife
Comedian Jenny Collier: 'Sexism I experienced on stand-up circuit should be extinct'

Jenny Collier: 'Sexism on stand-up circuit should be extinct'

The comedian's appearance at a show on the eve of International Women's Day was cancelled because they had "too many women" on the bill
Cannes Film Festival: Ken Loach and Mike Leigh to fight it out for the Palme d'Or

Cannes Film Festival

Ken Loach and Mike Leigh to fight it out for the Palme d'Or
The concept album makes surprise top ten return with neolithic opus from Jethro Tull's Ian Anderson

The concept album makes surprise top ten return

Neolithic opus from Jethro Tull's Ian Anderson is unexpected success
Lichen is the surprise new ingredient on fine-dining menus, thanks to our love of Scandinavian and Indian cuisines

Lichen is surprise new ingredient on fine-dining menus

Emily Jupp discovers how it can give a unique, smoky flavour to our cooking
10 best baking books

10 best baking books

Planning a spot of baking this bank holiday weekend? From old favourites to new releases, here’s ten cookbooks for you
Jury still out on Manchester City boss Manuel Pellegrini

Jury still out on Pellegrini

Draw with Sunderland raises questions over Manchester City manager's ability to motivate and unify his players
Ben Stokes: 'Punching lockers isn't way forward'

Ben Stokes: 'Punching lockers isn't way forward'

The all-rounder has been hailed as future star after Ashes debut but incident in Caribbean added to doubts about discipline. Jon Culley meets a man looking to control his emotions
Mark Johnston: First £1 million jackpot spurs him on

Mark Johnston: First £1 million jackpot spurs him on

The most prize money ever at an All-Weather race day is up for grabs at Lingfield on Friday, and the record-breaking trainer tells Jon Freeman how times have changed
Ricky Gervais: 'People are waiting for me to fail. If you think it's awful, then just don't watch it'

Ricky Gervais: 'People are waiting for me to fail'

As the second series of his divisive sitcom 'Derek' hits screens, the comedian tells James Rampton why he'll never bow to the critics who habitually circle his work
Mad Men series 7, TV review: The suits are still sharp, but Don Draper has lost his edge

Mad Men returns for a final fling

The suits are still sharp, but Don Draper has lost his edge
Google finds a lift into space will never get off the ground as there is no material strong enough for a cable from Earth into orbit

Google finds a lift into space will never get off the ground

Technology giant’s scientists say there is no material strong enough for a cable from Earth into orbit