The leading industrial countries have held ten 'economic summits' since 1975. What ought to be discussed at these summit meetings? Professors Willem Buiter and Rudiger Dornbusch, Dr David Owen MP and David Watt addressed just this question at a lunchtime meeting on June 6th. Lord Hunt of Tanworth, former Cabinet Secretary, chaired the meeting, which was hosted jointly by CEPR and the Royal Institute of International Affairs.

In his opening remarks, ex-sherpa Lord Hunt noted that the summit meetings had always been poised between the alternatives of a 'fireside chat' at which the world leaders could meet informally, and a more formal meeting devoted to the management of the world economy. In his experience, however, there had been relatively little time for discussion of economic questions at these summits.

Professor Buiter, CEPR Programme Director in International Macroeconomics, spoke on the main macroeconomic issues facing the OECD countries. The current economic recovery was fragile and unbalanced. It was strong in North America and Japan, but in Europe could be called a recovery only by an 'abuse of language'. Output in Europe had risen, but not employment, and unemployment remained at levels which would have been completely unacceptable a decade ago. It was an anaemic recovery, which risked faltering because it was a high interest rate recovery. This was because governments were employing an inappropriate mix of fiscal and monetary policy, not because of strong investment demand.

What policy changes were needed in the main industrial countries?
A 'minimum programme' of policy changes in Europe required a net stimulus to aggregate demand through fiscal expansion. This should be transitory and self-liquidating in nature, so that it should not 'crowd out' private spending as growth resumed. The expansion should also be 'supply-side friendly', involving increases in public investment and reductions in taxes on labour. The fiscal expansion should be accompanied by an accommodating monetary policy. In America, Buiter argued that there should be an immediate decision to increase taxes, to take effect in 1985/86, together with a general tightening of fiscal policy. Monetary policy should be cautious. In Japan there should be a fiscal stimulus immediately, encouraging a shift to domestic demand, away from exports.

Rudiger Dornbusch, Professor of Economics at the Massachusetts Institute of Technology, outlined a 'minimum programme' for dealing with the international debt crisis. He noted that the situation had changed substantially in recent months, and that the complacency of 1983 was now quite inappropriate. The Federal Reserve Board and the Institute for International Economics in particular had argued that the debt crisis would disappear, based on their projections of debt/export ratios. The projections had assumed that exports would grow strongly and that interest rates would fall, as would the value of the dollar. Thus both debt service payments and the real value of the debt (largely denominated in dollars) would fall. On these assumptions, the debt crisis was projected to disappear very quickly.

Dornbusch described how the projections of 1983 had gone wrong. The growth in the OECD countries, though not strong, had nevertheless generated some export growth in the debtor countries. But the value of the dollar had not fallen - it had risen. Most important of all was the rise of US interest rates. The adjustment programmes drawn up in 1983 could not now be carried out because of the increased interest payments due. The story was the same in all the less developed debtor countries - sharp rises in interest rates and debt service payments, with no corresponding rise in export prices. The source of the new difficulties was increased interest payments on the old debt, not new borrowings.

What policy decisions should the summit take concerning international debt? Dornbusch and Buiter urged that interest rates be 'capped' at 10% for a three-year period. These interest rate 'caps' should not apply to all debtors, but only those which had agreed an adjustment programme with the IMF. At the same time the IMF should give more attention in its adjustment programmes to export growth and less attention to the reduction of imports through domestic contraction. The industralized countries should reverse the trend towards increased protectionism in their trade with the developing world.

Dr. David Owen considered the political or 'strategic' decisions which should be taken at the summit. He argued that each government needed to consider a series of 'trade-offs'. They should be willing to consider making domestically unpopular decisions, in return for other governments doing the same where these decisions would revive the world economy. But he did not expect such decisions to be taken at the London summit.

Dr. Owen proposed that the United States government take immediate steps to reduce its budget deficit, which had led to high interest rates and a faltering world economic recovery. He argued that the US would be more willing to take steps to reduce government and in particular defence spending if Europe offered to shoulder a greater share of the cost of European conventional defence. He argued for a 'modest reflation' in Europe, led by Germany and Britain. Japan should not be induced to increase its defence spending, but rather should be persuaded to increase its aid to developing countries. It should also export more capital, especially through more investment projects in Western Europe. In addition, it should continue liberalising its financial markets and allow the yen to be further internationalised.

Dr. Owen argued for increased policy coordination among the summit governments, aimed at sustained economic growth, lower unemployment, and reduced exchange rate volatility and misalignments. Complacency was likely to dominate the London summit, however. The summits needed to consider not just economic issues, but a wider series of political or strategic tradeoffs if they were to engage seriously the interest of political leaders.

David Watt, former Director of Chatham House and author of a recent Twentieth Century Fund paper on 'summitry', discussed what such summits might usefully accomplish. He saw some general benefits from these meetings. They oil the wheels of diplomacy and encourage the leaders to concentrate their minds on economic issues, however briefly. They also allow the leaders to justify domestically unpopular policies as the result of agreements made with other governments.

Do the summits actually help solve any outstanding problems? Some decisions had been taken at earlier summits, but the general record was patchy, according to Watt. He thought that the current leaders would not use the occasion of the London summit fruitfully. Many of them were averse to the concept of economic management, preoccupied by elections, or temperamentally reluctant to take difficult decisions. If the leaders do not have the political will, difficult decisions simply will not be taken. You can't teach cows to fiddle, Watt concluded.