View from City Road: Summit co-operation not at a peak

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The Independent Online
Edouard Balladur, Silvio Berlusconi, Gunter Rexrodt; everyone else has had their say on the dollar, so why not Bill Clinton too? Briefly summarised, the story so far is that most of G7 finds the plight of the ailing dollar a big yawn. Virtually everyone has ruled out co-ordinated interest rate changes; some have gone further and said they don't see the point of central bank support either.

In Naples, where heads of state are meeting for the World Economic Summit, Mr Clinton yesterday added his pennyworth. No special measures are needed to prop up the dollar, he insisted. Forget anything that would bring the US expansion to a screaming halt, such as a big rise in interest rates.

Lloyd Bentsen, the US Treasury Secretary, was at it too. The latest set of buoyant US employment figures was no reason for a rise in interest rates, he said. As for the dollar's progress on the foreign exchange markets, Mr Clinton asserted: 'Eventually, the macro-economic realities will assert themselves and the currencies will be righted.' So it is back to a policy of benign neglect.

All politicians always believe their currency is undervalued. Mr Clinton may well be right that the dollar is not fairly reflecting the pace of US expansion, which has been solid for the past 18 months. For the time being, however, the markets plainly do not agree. His comments yesterday caused the dollar to plummet once more.

As the Germans pointed out earlier this week, there are some fundamental reasons for the dollar's weakness, not least the fear that a failed healthcare reform package will reinflate the US budget deficit. US domestic savings are still dangerously low; America is living off other people's money.

So with the summit barely under way, everyone has had his say on the dollar. The irony is that G7 summits were originally conceived because of the currency turmoil of the early 1970s. It was thought that only close economic co-operation among the big industrial powers could bring a semblance of order to the markets.

Today, the summits are further away from their original objectives than ever. Japan and the US are getting nowhere fast in resolving their trade dispute. Germany criticised US economic policies before its delegation even arrived in Bellanapoli and Mr Berlusconi, Italy's maverick Prime Minister, weighed in with his view that the dollar could not be saved. So much for summits.