The personal political implications are far less important than the damage a depression does to society. Yet they give an indication of the threat to the existing world order. There are seven countries at the Munich meeting: America, Japan, Germany, Britain, France, Italy and Canada. If this meeting fails, none of the presidents or prime ministers can be confident of retaining office for very long. John Major, with an election immediately behind him, is the most secure, but even he would be under great pressure. If the present G7 hierarchy continues to deliver depression, it will be replaced by statesmen committed to expansion at all costs.
The chief issue at Munich will be the reduction of world interest rates. In the US, short- term rates have already been reduced to their lowest level since the early Sixties. That has produced some recovery, but only a weak one, with two dips into recession and perhaps a third on the way. Interest rates were cut there again last week.
No US president has ever been re-elected on so dismal an economic record; support for George Bush in the opinion polls has been collapsing. Not since 1912 has an incumbent president risked running third in the election. Even if Munich produces a general reduction in world interest rates, it may be too late to save him; interest rate cuts take about a year to affect the general economy. But at least reductions would show that the economic system was not out of control.
The Canadian government is very unpopular, as are most of the G7 governments. Kiichi Miyazawa, the Japanese prime minister, has plans for a Japanese recovery programme but the country's stock market and real estate collapses have been exceptionally severe. The US, Canada and Japan all need a concerted policy to restart world economic growth.
The non-German European governments are in at least equal difficulties. France is immobilised by the road and rail blockade, an illegal stoppage the government does not choose to confront. Italy has the weakest government and the most serious financial crisis of the G7. Britain has suffered the worst recession, starting in parallel with the American, but now running in parallel with the European. Hopes of a recovery after the election have faded, and our recession could now last for three or four years. All three countries have high unemployment, and are forced to accept high interest rates by German dominance of the exchange rate mechanism.
The latest unemployment figures are 9.6 per cent for Britain, 10 per cent for France and 11 per cent for Italy - mass European unemployment. Real interest rates are 5.7 per cent for Britain, 6.9 per cent for France and 7.8 per cent for Italy. These are intolerable in a period of such high unemployment. ERM interest rates are, however, set by the Bundesbank in Germany and for Germany. They have been kept at a penal level because of anxieties about the 8 per cent growth rate in Germany's broad money. This may not make much sense, as high German interest rates are now drawing vast funds into Germany and actually increasing the German money supply. The Bundesbank will next meet on Thursday, and latest reports suggest that it is determined to maintain these penal rates.
In the US, real interest rates have fallen below 1 per cent; even so, the American broad money supply is growing very slowly and recovery has remained fragile. At least there has been some recovery, but in Britain no recovery is likely so long as interest rates remain at their present levels.
The world depression was bound to make governments unpopular. In Britain, fear of the Labour Party enabled the Conservatives to win the election, with a reduced majority, but the political pressure has not disappeared; this has concentrated on the European issues of the ERM, Maastricht and the single currency. If the depression continues and becomes deeper, Europe will be blamed as the cause of Britain's economic suffering.
Norman Lamont, the Chancellor of the Exchequer, has no room for manoeuvre unless the Germans agree general world interest rate reductions. The depression has weakened his support inside his own party and the Prime Minister may need to look for a replacement before the party conference in the autumn. Yet making Mr Lamont a scapegoat would not resolve the problem of the ERM, nor would it return British economic policy to the Government and away from the Bundesbank.
Germany is in a minority of one at Munich. However, the Bundesbank has its independence guaranteed by the German constitution. Even if Helmut Kohl wants agreement with his G7 partners, he may not be able to secure the agreement of the Bundesbank to cut interest rates. The Bundesbank is determined to maintain its independence. Even if a refusal to cut interest rates were to result, as it well might, in the Maastricht treaty being repudiated by the French referendum in September, or by the Commons later on, that would not worry it. The Bundesbank does not like the treaty because it would replace the mark with a European currency and transfer the power of the Bundesbank to a European bank.
There is a great danger that there will be no progress towards general interest rate reductions at Munich. That will present Britain with a difficult choice. Either we can stay in the ERM and accept deflationary real interest rates, however inappropriate, until the Bundesbank is ready to cut them, or we can get out. Staying in could mean another 18 months to two years of depression and the destruction of further swathes of British business and employment. It would probably also mean a new chancellor, perhaps even a new prime minister, so unpopular is the depression. There are limits to the patience of the British people.
We could, of course, leave the ERM and reduce interest rates to the appropriate level of 7 per cent or below. But that would be difficult for Mr Major; he took us into the ERM - at the wrong rate and at the wrong time. Some people in the Treasury and the Bank of England would regard leaving it as a betrayal of their anti-inflation policy. They are probably wrong in thinking that the present anti- inflation tactics are viable. Low inflation comes from stability, not from creating an intolerable depression that will inevitably produce an overreaction.
If the Bundesbank is not prepared to make substantial and progressive reductions in interest rates, the choice of continued depression or exit from the ERM is inescapable. Mr Major has based his whole policy, including his most recent support for Maastricht, on an Anglo- German understanding in Europe. It is not an unreasonable policy, but it will only work if Chancellor Kohl can deliver lower European interest rates. In the next few days we shall discover whether he can or not.
One thing is certain. British public opinion, which can make itself heard between elections without having to block the motorways, will not accept another two years of depression. Our nation is not prepared to be bankrupted and unemployed because the Bundesbank - which has not been elected by anybody - says so.Reuse content