William Drozdiak :
© Washington Post, July 9, 2001.
U.S. Treasury Chief Upbeat
But Europeans at G-7 Talks See No Quick Recovery
by William Drozdiak
ROME Treasury Secretary Paul O'Neill said over the weekend
that the United States was poised for a significant economic upturn
later this year that should help revive the world economy, provided
that Europe and Japan do their share to stave off recession.
At a meeting here of finance ministers from the world's Group of
Seven leading industrial democracies, Mr. O'Neill said the United
States, Europe and Japan must better coordinate policies to
restore economic momentum at a time when all three regions have
been suffering a downturn.
"We all agreed that growth in each of our economies is crucial to
prosperity around the world," Mr. O'Neill said Saturday after five
hours of discussion with his peers.
"We in the United States have taken strong measures in both fiscal
and monetary policy to return our economy to a higher growth
path," he said. "And I continue to believe that the prospects for
long-term global prosperity are better now than at any time in our
Mr. O'Neill cited a sustained boom in housing starts and
near-record sales of cars and light trucks as evidence that the
United States is about to begin a new period of expansion. After
seeing the U.S. growth rate fall to 1.2 percent from 5 percent last
year, he said, the American economy should resume expanding by
more than 3 percent early next year.
Several European finance ministers, however, said they did not
share O'Neill's optimism. The chancellor of the Exchequer,
Gordon Brown, said the global downturn had proved "more
severe than expected" and that hopes for an early recovery might
be premature, given the bleak forecasts for much of Europe and
Afterward, analysts remained skeptical about the prospects for
any concerted, fresh policy action by Europe to contribute to a
turnaround in global economic prospects.
The U.S. and European ministers openly disagreed before the
meeting over who should be responsible for acting as the
"locomotive" for the rebound. Frustration at the inability to directly
influence persistently high energy prices was also evident.
As a result, little in what was said is likely to calm the nerves of
increasingly volatile international financial markets - always mindful
of the history of G-7 disharmony and investor angst. A public
U.S.-Europe dispute about interest rate policy in 1987 has
frequently been cited as a trigger for the stock market crash that
The G-7 meeting, which was called to prepare a summit
conference on the global economy that will bring President George
W. Bush and seven other leaders to Genoa, Italy, this month,
opened with some acrimony after France and Germany took
exception to Mr. O'Neill's call earlier this week for Europe and
Japan to do more to reverse the world slowdown.
Mr. O'Neill said before leaving for Italy that the United States was
doing its part but that Europe and Japan "need to play a
locomotive role as well." On Saturday he explained that the train
he envisioned should be powered by a "three-engine locomotive"
that featured Europe and Japan working with the United States.
Finance Minister Hans Eichel of Germany dismissed as "nonsense"
reports that his country would soon lapse into recession and said it
was foolish to blame Europe for not doing enough when it was
now the strongest among the three regional economic powers. But
he welcomed Mr. O'Neill's upbeat prediction, saying a U.S.
recovery "would be good news for all of us."
The French finance minister, Laurent Fabius, said Europe was
growing more quickly than the United States for the first time in a
decade and should not be blamed. "We have to look at the
essentials, and there are two," Mr. Fabius said. "The main origin of
the current downturn is the American slowdown and the rise in oil
Mr. Fabius said the United States should look to its own
problems, notably the high level of individual debt and record
number of personal bankruptcies. He said the United States
needed to show greater discipline in cultivating domestic savings at
a time when the country is running the biggest
balance-of-payments deficit ever.
In response, Mr. O'Neill expressed exasperation with
comparisons of who was doing more to help the world economy.
"We are not here to throw rocks at each other," he said.
Other U.S. officials noted that the Federal Reserve Board had cut
short-term interest rates six times this year, by a total of 2.75
percentage points, and that Congress had recently passed a $1.35
trillion package of tax cuts.
In contrast, the European Central Bank has cut rates just once this
year, by 0.25 percentage points, because it says that inflation
remains a serious threat. And European governments have not
accelerated plans for income tax cuts even though growth
prospects have diminished steadily in recent months.
Several ministers said a critical factor in the global economy's
health will be whether Japan's prime minister, Junichiro Koizumi,
fulfills his promise to carry out banking and fiscal reforms to pull
the world's second-largest economy out of a decade-long slump.
The soaring value of the dollar has been cited by U.S. exporters as
another source of trouble, but the absence of central bankers at
the G-7 meeting limited discussion about finding a new equilibrium
for the world's major currencies. Europe's new single currency, the
euro, dropped near its all-time low against the dollar last week -
just over 83 cents.