G7 ministers keep eyes on Iraq conflict - Greenspan urges calm: Deck two goes here right here again right here right here
www.nationalpost.com Peter Morton Financial Post Monday, February 24, 2003
WASHINGTON - As they did just before the last Iraq war a decade ago, the world's leading finance ministers have decided to sit on the sidelines while vowing to step in if the global economy takes a turn for the worst after any conflict is over.
Finance ministers from the G7 group of countries, including Canada, wrapped up their weekend meeting in Paris with no co-ordinated plan to steer the economy through the turmoil that may follow a U.S.-led attack against Saddam Hussein.
"We have no hidden plan," said Francis Mer, the French Finance Minister. "We decided that it was useless to go into details on the possible scenarios."
"Each G7 nation must take its own steps -- appropriate to its own respective sets of conditions -- to spur growth," John Snow, the U.S. Treasury Secretary, said at his first meeting of international finance ministers and their central bankers. The G7 countries are Canada, the United States, Japan, Germany, Britain, France and Italy. Russia was also included.
The final communiqué from the finance ministers, including Canada's John Manley, talked generally about the "geopolitical uncertainties" hanging over the global economy. The ministers avoided any direct reference to an Iraq-U.S. showdown, presumably because of the split between France and the United States over military intervention.
The finance ministers were given a private briefing by Alan Greenspan, the U.S. Federal Reserve chairman, about the impact of sharply higher oil prices -- up 33% to US$37 per barrel in the past three months -- on global economic growth.
World growth is cut by 0.5% for each US$10 per barrel rise in prices.
The good news from Mr. Greenspan was that industrialized countries have cut in half their use of oil relative to the size of their economies over the past decade. As a result, "the ability to adjust [to oil price spikes] is pretty significant," said Mr. Snow, paraphrasing the Fed chairman.
As an example, Mr. Greenspan told the finance ministers oil refineries are able to postpone maintenance schedules, while consumption also falls in response to high prices. "There's flex in the system -- I think the judgment was we'll be able to manage our way through this," Mr. Snow said.
At the same time, it is no longer in the interest of oil-producing countries to keep prices high "because it makes their market more unstable," he said.
Mr. Greenspan did admit to finance ministers that high oil prices, mainly stemming from the labour problems in Venezuela, were having an effect on the United States and other G7 economies. "It's like a tax," said Mr. Snow.
Economists are worried about the impact of high oil prices, especially on the struggling U.S. economy.
John Silva, chief economist at Wachovia Securities, said on Saturday he has cut his assessment of second-quarter growth in the United States to 1% from 3.1% as the impact of soaring gasoline prices -- now averaging US$1.66 per gallon, near the May, 2000, record -- begins to ripple through the economy.
"Higher gasoline prices are clearly taking a toll on already jittery consumers," he said. "We cut equipment spending, lowered inventory gain and increased our estimate of the nation's trade deficit." The U.S. deficit soared to a record US$435-billion last year.
Merrill Lynch & Co. said late last week that Mr. Greenspan's expectations of a 3.5% to 3.75% growth in gross domestic product were optimistic. "It will probably take a 4% annualized growth in the second half of the year to get the 'official' forecast of 3.5% to 3.75% on a fourth quarter to fourth quarter basis."
The U.S. economy, with its growing trade and government deficits, prompted some debate during the two-day meeting.
While Mr. Snow attempted to defend the US$674-billion tax cut plan of George W. Bush, other finance ministers worried about U.S. government spending.
"We have been witnessing a rapid deterioration of the U.S. current account position as well as the U.S. general government deficit, especially over the past two years," said Nikos Christodoulakis, the Greek Finance Minister. Greece is currently head of the European Union.
"Large twin deficits may create sustainability risks, which in case they materialize would have significant ramifications beyond the U.S.," he warned.
But Mr. Manley, with the economy most closely linked to the U.S., disagreed. "For the moment, we accept the view of U.S. authorities that neither deficit is as of yet a problem," he said .
Mr. Manley can afford to be more charitable than his G7 counterparts. Not only did Canada have a trade surplus with the U.S. of US$49-billion last year, it is expected to have a healthy growth rate of 4% this year, well ahead of the 3% expected by Wall Street economists for the U.S. and 1% for the European zone.
The finance ministers, however, did note in their communiqué that the G7 economies "are experiencing slower growth, yet they remain resilient." The ministers expressed confidence in the global economy, just as they did in New York days before the 1991 U.S.-led coalition attack on Iraq.
On an optimistic note, Horst Koehler, head of the International Monetary Fund, said that a short conflict in Iraq could be a positive for the global economy. In addition, most energy economists expect oil prices to drop by at least US$10 per barrel during the second half of this year if an Iraqi war is short.
What worries the ministers the most, however, is what happens in the weeks and months following a war in Iraq. The U.S. and the rest of the world slipped into a recession after the 1991 war. It took nearly two years to recover.
Anxious to avoid a repeat, the ministers attempted to offer reassurances they would take some steps, likely through lower interest rates and increased liquidity.
"We will not hesitate to act," said Wim Duisenberg, president of the European Central Bank. "The high level of uncertainty remains a key concern for growth prospects, and geopolitical concerns play a key role in this perspective."
So far, the pledges are not very reassuring.