The Rambouillet conference

Down and out in Paris

Brian Griffiths

The past few years have in many ways been a painful experience for the Western world. Inflation has reached proportions unknown for half a century; the deficit expenditures of governments have risen to record levels; never before has the collective balance of payments of the industrial countries been so much in the red; the OPEC countries have given all other producers of raw materials a successful lead in how to form and exploit cartels; and most recently, as if all these problems were not enough, all countries find themselves in the throes of the worst recession since the 1930s.

The weaknesses and the dangers of the present situation — namely the lack of any genuine commitment by most countries (except the US) to the present monetary system, the impasse reached in the Tokyo round of trade negotiations, the seeming lack of leadership or at least of a common response to the oil producers' initiative of the past two years, and the possibility of an escalation of import controls and non-tariff barriers into a full-scale trade war — are all too obvious.

It is against this background that President Giscard d'Estaing took the initiative earlier in the year in convening a conference of the heads of government of the leading nations of the developed world — Germany, France, Italy, Japan, the UK and the US (and, originally, Canada) — to be held this weekend at Rambouillet, near Paris. The gathering, for which no official agenda has been published and which is being held in an atmosphere of strict secrecy, is also to be attended by the foreign and finance ministers from the countries concerned. It is an initiative which is welcomed in most countries, not least because it shows the Community and France in particular to be deeply concerned about the present situation.

Giscard's original intention was that the meeting should be taken up with the dangers of =loafing exchange rates and the need to return as some form of fixed parity system. Over the past month or so, however, the agenda has been extended to cover five major topics — the reflation of the world economy; the barriers to trade among developed countries; energy, raw materials and the North-South problems; exchange rate adjustment and the international monetary system; and East-West trading problems.

The expectation of what the conference might produce differs between countries. The extended agenda clearly reflects US influence, though the US seem to view it simply as an exchange of views and are under no illusion that it will produce some grand blueprint for the future of the international economy, which will do for the next quarter century what Bretton Woods did for the last. On the other hand, the French are likely to see it as more than an exchange of ideas. Giscard's intention seems to be that it should lay down fairly definite 'joint guidelines', in particular for the reform of the world monetary system, the details of which can then be developed by the central banks and finance ministries of the countries involved. Both the Germans and the Japanese would probably be prepared to go along with any outcome which reaffirmed a liberal world order and any monetary arrangement which maintained 'reasonable flexibility of currencies. As far as the British and the Italians are concerned, who have little to give away except debt and little to hope for except credit, it is difficult to see how they can but fail to acquiese in any agreement — providing that it does not call for discipline on their part.

Of all the issues, by far the most immediate is the recovery of the world economy from the present recession. As a result of the increasing growth of world trade since its liberalisation after the second world war and the integration of capital markets since 1958, the economies of the leading countries of the Western world have become extremely interdependent. The problem is that each country stands to gain if other countries take the lead in reflation, as their balance of payments will improve, but that conversely each country stands to lose if it takes the lead, not merely because its balance of payments will deteriorate but also because its rate of inflation will rise.

Because of the sheer size of the US economy and the fact that both the German and the US counter-inflationary policies are patently successful, most countries are looking to a recovery in these countries to lead the world recovery. Because the recovery seems to be slow to start there is a general feeling that both Countries could apply some extra monetary and fiscal stimulus, over and above what they have already done. Certainly both the British and the Italians have a great deal to gain from a rapid US reflation. On the other hand, Giscard, who is known to favour the principle of balanced budgets is hardly likely to encourage the US to engage in the same profligacy as ourselves or the Italians, especially at a time when the US deficit is around $80 billion and the President, because of his re-election, has every incentive to pursue expansionist policies.

Moreover the spectre which looms large over the world economy at present is not another Great Depression but a greater inflation. For this reason it is essential that both Germany and the US resist the kind of temptation to which the Heath government succumbed in 1971/3 in its Gadarene descent to reduce unemployment and raise the growth rate. The painful fact is that the slower the world recovery the stronger and more sustained is the resulting boom likely to be because the longterm rate of inflation will be less; and even though this may not catch the fancy of a politicians about to face re-election, it is of critical importance if -we are to avoid either a more rapid inflation or a return to a more dirigiste world ecor omy. In any case as countries' monetary and fiscal policies are decided primarily in the light of internal political pressures, it is highly unlikely that either Germany or the US will be induced to reflate more rapidly.

Next on the agenda after this and for no other reason than out of deference to the host country, must surely be the future of the monetary system. The French attitude under

Giscard is that the present structure of the international monetary system, in particular the permissiveness which a system of floating exchange rates allows, is responsible not only' for the world inflation but also for the fragmentation of the Western world and the consequent lack of agreement among countries in dealing with common problems. MonetarY independence has not only produced inflation but also individualism which is ultimately deterimental to the interests of the industrialised world. The only way in which discipline can be restored is by a return to fixed exchange rates. Although not even the French would want to argue for an immediate return to fixed exchange rates, which would be a disaster (especially for a country such as the UK) given the large discrepancies between countries' rates of inflation, nevertheless it is possible that countries may be persuaded to agree, in principle, to a stricter management of the floating rate system in order to ensure its stability at a time of recession. Such an initiative in this direction now could well be followed later on in the recovery by further demands from the French, on the lines that having accepted greater management of the system in principle the boom is the occasion to translate an idea into some concrete scheme of managed floating.

It is certainly very difficult at present to see any tangible benefit from restricting the movement of exchange rates. The Bretton Woods system broke down because it proved incapable of dealing with the inflationary pressures of the past five years. Since 1973 the floating regime has been subject, largelY 'through OPEC, to enormous strains which it has weathered well. It would be the height of folly at present for the leading industrial countries of the world to put on some collective economic straightjacket, in which their mein to manoeuvre was deliberately sacrificed to some French ideal of community.

By far the most serious problem which the conference has to tackle is the prospect of a trade war. The immediate background in this area is disturbing — the French import surcharge on Italian wine, the prospect of import controls here in the UK, the US decision to investigate dumping by European steel and car producers and EEC pressure for import restrictions on Japanese imports, especiallY steel. It is no exaggeration to say that the world economy is at present far closer the brink of a trade war than at any other time since the 1930s.

The area in which the conference could, d° most damage is that of North-South relations. The Third World's demand for a New International Economic Order is little more than an attempt to replace a market economy IV Monopsony Socialism and to politicise every market which involves trade between nations. Kissinger's speech at the UN Assembly in September was a powerful denunciation of this trend. At the same time, however, he Wa5 careful, and rightly so, to recognise• the responsibility of the industrialised countries to the Third World, not by interfering in markets but by creating various schemes which would effectively compensate those countries placed under great pressure because of the loss of export earnings. The oil cartel as well as others are already under great pressure to break UP. The greatest disservice which Rambouillet could do is to prop them up.

In addition the Tokyo round of trade negotiations has effectively ground to a halt. One example is the negotiation of a Code 00

Industrial Standards. It is rumoured that a Code in this field has virtually been completed but is being held up because the bureaucracy in Brussels are unable to agree among themselves on a Community industrial policy. Not wanting the Community to engage in the same folly as it did in devising a common agricultural policy, especially when an agreement has been almost reached, the US is naturally reluctant to stand by and wait The most important contribution Which the conference might make (and it might be seen as a price paid by the French for US agreement to move to a system of managed floating) is to halt the drift to protectiionism and give a positive lead to the present trade negotiations. One cannot expect such a conference as this, Which attempts to cover inflation, growth, unemployment, energy, raw materials, trade and the international monetary system — all Within a matter of two days — to produce anything in the way of detailed proposals. What is vitally important however is that the countries concerned affirm their belief in, and Commitment to, a liberal economic order, that In the immediate future they exercise their Political will in avoiding a trade war and a deterioration of trading conditions and that they avoid any commitments to act collusively in response to the growth of cartels over the Past few years. No more than this can be expected of such a conference, but neither should we expect any less, otherwise the Prospects for the world economy for the next few years will be very gloomy indeed.