Economics now divides the US and Europe

The dollar-euro rate is like a seesaw: what benefits the US discomforts Europe and vice versa

Can one imagine a more difficult meeting than the annual, so-called G8 summit due to be held in a week' s time? At the table will be the leaders of the seven largest industrialised countries in the world plus Russia. There will be much to quarrel about, not least the weakness of the dollar and Iraq.

This year the summit takes place at Evian in France. The location in itself provides a difficulty for it means that George Bush, the American President, will have to make his first visit to the land of the "cheese-eating surrender monkeys" and attend a meeting chaired by the leader of the international opposition to US policy, Jacques Chirac. The French President telephoned Mr Bush on Thursday. It was their first conversation since 15 April. It lasted just 10 minutes.

The next day the US Secretary of State, Colin Powell, came to Paris to prepare for the summit. When asked about the state of the Franco-American relationship, he spoke like a schoolmaster giving a second chance to a difficult pupil. Referring to French support for the UN resolution on Iraq approved last week, he said: "It was a step in the right direction ... which does not mean that past disagreements will be forgotten." We used to think of the French as arrogant, but nobody beats the Americans these days.

The French, however, are incorrigible. Take their tactics in the Middle East. They know that the US has decided not to meet with Yasser Arafat any more. Instead the Americans will "invest their time and energy" in the new Prime Minister, Mahmoud Abbas. So where does Dominique de Villepin, the French Foreign Minister take himself this weekend? Why, to the West Bank to see Mr Arafat as well as Mr Abbas. Bravo!

But there are more serious subjects to consider than who visits whom. On this occasion economics is important. For the steady decline in the value of the dollar on the foreign exchange markets has serious consequences. It has fallen 29 per cent against the euro since its peak in October 2000. This very much suits the United States. A cheap dollar helps US exports at a time when domestic growth is sluggish and the slight inflationary bias it gives to the US economy goes some way to lift the threat of deflation.

In Europe, on the other hand, the effects are becoming disastrous, particularly for a big exporter such as Germany. It has been calculated that a 10 per cent fall in the value of the dollar cuts up to half a percentage point from European growth and deducts nearly a point from its inflation rate. Indeed the eurozone is likely to fall into deflation if the dollar declines much further. As it could do. The fall thus far is only half what it was against the German mark in the mid-Eighties.

Nonetheless this is a tricky subject for the summit participants to handle. Their interests diverge. The dollar/euro rate of exchange is like a seesaw: what benefits the US discomforts members of the eurozone and vice versa. It is true that successive US Treasury Secretaries have recently given the impression that a strong dollar is no longer American policy and that this has spooked the foreign exchange markets. But why shouldn't they come to such a conclusion if it fits in with their notion of the national interest? In any case, no single central bank can control the foreign exchange markets.

Much more reprehensible is the sort of attitude struck by Gerhard Schröder, the German Chancellor. A week ago he said that he did not see "any danger of deflation in Germany" even though the International Monetary Fund had just warned him that "mild deflation is fairly likely to take hold". One of the silliest habits of politicians is to deny the existence of problems which are evident for all to see.

Overhanging everything else, though, will be the dramatic change in American foreign policy since George Bush entered the White House. At Evian it will seem as if some of the participants have each assumed the other's history. Thus the United States is beginning to behave like a 19th century imperial power with its newly expressed policy of pre-emptive action as demonstrated in Iraq. Metternich, Bismarck and Lord Salisbury would feel perfectly at home in contemporary Washington. Characteristically, the American neo-conservatives advancing this doctrine admire the young Churchill, the liberal imperialist, more than the older Churchill.

France and Germany, on the other hand, largely accept and admire what American leadership achieved between 1945 and 2000. In place of empires there was a concert of great powers whose steering committees were centred on the United Nations and other multinational institutions. Joined by Russia, both France and Germany wish that approach to continue. Presidents Roosevelt and Truman would be welcome visitors to Paris and Berlin. But as the political historian David Marquand wrote last week: "The United States that I have admired for most of my life no longer exists."

What a row about all this there could be. For this reason M. Chirac may be tempted to focus the summit on less divisive subjects: aid for developing countries and opening up Western markets for their products, dealing with global warming, and considering how to make Western medicines available cheaply to the world's poor. The British should appreciate this. It would be, after all, a pragmatic approach.