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Economic Summit Faces Challenge of World Jitters

June 07, 1987|TOM REDBURN | Times Staff Writer

VENICE, Italy — It began in late March as an early-morning blip on a Tokyo computer screen. A trade war over computer chips was looming between the United States and Japan, and currency traders, afraid that the United States would be the big loser, were clamoring to sell U.S. dollars.

By the time the dust had cleared several weeks later, the dollar had plummeted in world money markets, interest rates in the United States had jumped sharply and inflation fears were rising again. Everyone from the first-time home buyer in Akron to the stolid Swiss bankers of Zurich had felt the fury of the latest global economic jitters.

"All that volatility in exchange rates and interest rates in recent weeks gives a little taste of how vulnerable our own financial markets and our economy have become to what other people think," Federal Reserve Chairman Paul A. Volcker said last month. "We are rather obviously in danger of losing control over our own economic destiny."

Financial Anxiety

As the leaders of the seven largest industrial democracies gather here Monday for their annual economic summit, that recent wave of financial anxiety will be very much on their minds.

Although the storm clouds have since diminished, the allies face the challenge of overcoming their very different approaches to economic policy. The risks if they fail: a decline in world trade and another plunge in the dollar that could bring their last five years of generally rising prosperity to a grinding halt.

"It really boils down to an ongoing impasse between the United States, Japan and West Germany," said Alan Stoga, a senior economist at Kissinger Associates, an international economic and investment consulting firm based in New York. "The deadlock over economic policy is at the heart of the industrial world's huge trade imbalances, our unstable capital markets and the dismal outlook for resolving the problems of Third World debt."

But the prospect for any break in the deadlock at the Venice economic summit appears bleak. With President Reagan besieged at home by the Iran- contra scandal and nearly all the other leaders facing equally intractable domestic political problems, few analysts expect any major breakthroughs during the three days of talks here.

'Just Drifting'

"We're just drifting because our leaders don't seem to have much of a shared sense of what they can do about these issues," said Robert Hormats, a senior partner for the investment firm Goldman, Sachs & Co. and a former high-level State Department official who was instrumental in planning the first economic summit 12 years ago.

"That doesn't mean we're facing any immediate crisis, but it does leave the world economy more vulnerable to a downturn than it otherwise would be."

Reagan Administration officials, arguing that their international economic goals can be reached once other nations follow through on previous agreements, acknowledge that few changes in policy are likely to come out of the summit.

"When economic waters seem to be troubled, the correct approach is a steady hand on the tiller, not any frantic search for a new course," said W. Allen Wallis, who, as undersecretary of state for economic affairs, prepared the advance work for the summit.

And leaders from the other nations represented at the summit--West Germany, Japan, France, Britain, Canada and Italy--also caution the financial markets against expecting any initiatives.

"The translation of previous announcements into practical policy is more important than new declarations and commitments," West German Chancellor Helmet Kohl said.

For the last five years, a buying spree by U.S. consumers has been the driving force behind not only America's economy but also the world's. Producers in Europe and Asia of everything from textiles to videocassette recorders grew by feeding the U.S. demand.

That worked as long as the dollar was highly valued on international currency markets, allowing Americans to buy foreign goods cheaply. But now that the dollar has fallen--more than 40% against the Japanese yen from its peak in 1985, for example--American consumers are no longer in a position to pull the international economy out of the doldrums. That leaves it up to other nations to stimulate their own economies.

'Main Engine of World Growth'

"Growth in the domestic United States economy has been the main engine of world growth, all the way back to 1983," Treasury Secretary James A. Baker III said. "This has caused our trade deficit to expand . . . and this, of course, is simply not sustainable in the long run. So it's our view that other industrial nations need to do more."

In particular, that means West Germany and Japan. But foreign leaders, especially in Germany, are reluctant to embark on a more expansionary course without a clear signal from Washington that the U.S. budget deficit will shrink fast enough to maintain currency stability and prevent a revival of worldwide inflation.

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