G7 clears the decks for recovery: Peter Torday looks at the key issues facing the World Economic Summit in Munich next week

THIS TIME last year the World Economic Summit was more preoccupied with the impending economic collapse of the Soviet Union than the global recession. In Munich next week, the leaders of the Group of Seven richest industrial countries are clear that their worries about the faltering recovery will predominate.

This concern has prompted a top-level behind-the-scenes effort to reach an accord on the foundering world trade talks. But if there is no agreement in sight by the weekend, GATT will be removed from the summit agenda, perhaps never to be revived.

Although the auguries are not good, Helmut Kohl, the German Chancellor and summit host, has asked James Baker, the US Secretary of State, John Major, the Prime Minister, and Jacques Delors, the EC Commission President, to engage in a last-ditch attempt to reach an accord.

The summiteers are meanwhile expected to offer Boris Yeltsin, the Russian President, who will join them for a post-summit session, a dollars 1bn ( pounds 525m) International Monetary Fund loan and a three to five-year moratorium on foreign debt repayments. But with the leaders of the United States, Japan, Canada, and the ruling Socialist party of France facing elections in the next 12 months, the overriding concern of the G7 is the world recovery.

A breakthrough on the world trade talks would promote an upswing in business confidence, a crucial development if predictions of a 3 per cent expansion in the industrial world next year are to be fulfilled. In its absence, there is little the G7 can do to lift the gloom.

Some G7 officials believe that, contrary to market expectations, the US and Japan are unlikely to reduce interest rates any further. The Bundesbank has signalled that high German rates, which are undermining recovery prospects in Europe, may not be cut significantly before the end of the year. With the pressure on both Germany and the US to curb their public spending, another potential spur to global growth has disappeared.

All eyes have therefore turned to Japan, which is set to announce a public spending stimulus to its domestic demand and hence, it is hoped, higher demand for foreign goods and a lower trade surplus. At best it is thought that Tokyo will boost spending by the equivalent of dollars 60bn. But the caution of the Japanese Ministry of Finance and the Bank of Japan may yet result in the package being scaled down.

US officials have in the past criticised Bonn (for increasing public spending), Frankfurt (for sustaining its high interest rate regime for so long) or Tokyo (for failing to stimulate demand), but this time they are set to put a positive gloss on developments at the summit on 6-8 July.

With the presidential election looming, the US priority is to exploit the occasion for the benefit of President George Bush. Senior US officials have already begun praising the Japanese package for its positive impact on the American economy.

They also welcomed recent German Budget proposals to rein in spending as the 'first step' in permitting lower German interest rates by relieving the burden on the Bundesbank, which has thus far shouldered alone the inflationary pressures of unification. Lower German rates would brighten the European and hence the US outlook.

But this sunny prospect contrasts sharply with fading consumer and business confidence in the US, Japan and Britain. Although the most evident signs of an economic upturn are emerging in the US, there are indications that the momentum of the US recovery is fading.

The British gloom about recovery is now so entrenched that officials have asked that no reference to it be made in the summit communique.

But with little to be done at Munich to strengthen recovery, the summiteers' most delicate task will be to contain Russian pleas for help without being put on the defensive.

The G7 is set to recommend a rescheduling of most of the former Soviet Union's dollars 65bn of foreign debt, an unprecedented move since it is likely to come before the IMF approves Russia's reforms.

The IMF is clearly disappointed at the pace of the Russian transition. The budget deficit has widened sharply as soft credits flood to enterprises that would otherwise go bankrupt. The privatisation programme has been postponed. Measures to float the rouble are half-hearted at best. But, under heavy pressure from the G7, the fund is preparing a dollars 1bn good faith loan.

If IMF negotiators in Moscow succeed in securing more progress on the reforms, Michel Camdessus, the IMF managing director, is ready to fly to Munich for the post-summit talks between the G7 leaders and Mr Yeltsin.

Members of the IMF negotiating team are nevertheless said to be deeply unhappy at being pressed by the G7 into making the loan - a first payment from the long-promised dollars 24bn of Western financial assistance.

Mr Yeltsin has begun a campaign to persuade the G7 to unlock the bulk of the dollars 24bn, saying the alternative risks the irretrievable failure of political and economic change. But the summiteers will find it hard to ignore the evidence of capital flight and lax policies, and are unlikely to veer far from the carrot-and- stick approach. The rest of Mr Yeltsin's money will await a credible reform programme.

(Photograph omitted)