The annual meeting of the heads of the G-7 nations will take place in Japan on May 26 and 27. While the gatherings used to be major milestones in the governance of the global economic system, they have steadily declined in significance in line with the group’s waning domination of the world economy. The G-7 continues to meet as a close-knit club of wealthy countries (Canada, France, Germany, the U.K., Italy, Japan, and the United States) with similar interests, but its governance role has been largely supplanted by gatherings of more diversified groups—such as the G-20, which accounts for 85 percent of global GDP, 75 percent of world trade, and about two-thirds of the world’s population—that can make greater claim to being representative of participating countries. The G-7’s share of global GDP has fallen from 68 percent in 1992 to 47 percent in 2015. And the absence of the world’s second largest economy (China) is a glaring illustration of its “old-boy” makeup.
Common concerns, no common plan
The top economic items on the agenda for the May meeting include: a discussion of potential actions to spur global economic growth, Japan’s intervention in currency markets, and concerns over excess capacity in the steel industry. None of these are areas where the G-7 is likely to reach a consensus for meaningful action. While there is a high level of concern about the evident weakness of the global economy, options for stimulus on the monetary front are extremely limited, and there are deep divisions over any expansion of fiscal deficits. Japan and the eurozone are already actively pursuing programs of quantitative easing, with the potential for negative interest rates. Meanwhile, the Federal Reserve is on a path of likely increases in short-term interest rates in coming months. The divergence of monetary policies implies further increases in the dollar exchange rate.
A global saving glut and universally low interest rates suggest that the present is an ideal time to make a major push to expand and modernize the public infrastructure, but the member governments remain more concerned about the overall size of their fiscal deficits and are being pressured to adopt contractionary fiscal measures. Germany and the U.K., in particular, are opposed to any joint commitment to additional fiscal stimulus.
Japan is alone in believing that its intervention in the exchange market can be justified. The more common view is that such individual country actions are likely to have only transitory effects and are overwhelmed but the larger resources of the private market. In addition, the United States can hardly agree to support a Japanese intervention at a time that it is encouraging China to rely on a market-based determination of its exchange rate.
The G-7 leaders may use the summit as an opportunity to reiterate their support for free trade. That seems likely in view of the weakness of growth in global trade over the past two years and the anti-trade rhetoric that has infused the U.S. presidential primary. However, there is no meaningful list of actionable measures that that could be put before the leaders. Similarly, a purposeful discussion of excess capacity in the steel industry, which has led to import restrictions by several countries, will be handicapped by the absence of China—the producer and consumer of nearly half the world’s steel.
While the group may voice common concerns about the state of the global economy, there is no consensus about how those concerns should be addressed.
Given the lack of agreement on significant economic measures, the summit may focus more than usual on discussion of some foreign policy issues, such as the refugee crisis in Europe and global terrorism. The lack of specific proposals in these areas, however, again suggests the discussion will be largely exhortatory and avoid controversial issues. As an example, while the other members may desire that Britain remain in the European Union, it is not evident that external comment would be beneficial to next month’s vote. Climate change will be on the agenda in the aftermath of the 2015 Paris agreement to limit the global rise in temperature, of which the G-7 members were strongly supportive. There are no plans for significant new commitments at the summit, however, and discussion may be limited by the host country’s controversial decision to expand its own reliance on the use of coal for electrical generation.
Overall, the G-7 meeting is unlikely to result in any significant agreement for coordinated action on the range of issues on the agenda. While the group may voice common concerns about the state of the global economy, there is no consensus about how those concerns should be addressed, and each member will be left to tailor their actions to their own individual needs. The G-7 remains as a useful forum for discussion and coordination among the industrial democracies, but its role at the center of global economic policy may have passed.