6 November, 2000
Albany Club, Toronto
I never met Bob Catherwood, but I always read and admired what he wrote in the Financial Post when I was in Ottawa as British High Commissioner. I am happy to be here today at this ceremony, which honours his memory by the award of scholarships bearing his name to two outstanding Canadian students. I know how gifted Diana Juricevic is, as we worked together at the Okinawa G8 summit earlier this year; and I am sure Sabina Han is of equal quality.
Anyone who comes to North America this November cannot escape from elections. They are the inescapable topic of conversation. Will Gore or Bush be the next President of the United States? What will that mean for Canada? How will the Canadian electorate react to Jean Chrétien having called an election early? How will the Liberals and the Alliance divide the seats in Ontario and what impact will that have across the country?
By the end of this year, these uncertainties should be resolved. In 2001, spare a thought for the electoral condition of the Europeans. If you should visit Europe in May of next year you will find us too full of election talk. Can Tony Blair sweep the board again? Or can the Conservatives win a majority of seats in England, forcing Labour to rely on their seats in Scotland and Wales? Can Signor Rutelli hold his coalition together? Can Signor Berlusconi make a comeback?
For students of the G8 summit process, like John Kirton and me and all the University of Toronto G8 team, these elections shape the future — but only part of the future. For we know that next year the Italian Prime Minister, whether it is Rutelli or Berlusconi, will welcome the American President, whether it is Gore or Bush, with the other G8 leaders to a summit at Genoa in July. We know the Canadian Prime Minister will host a summit somewhere in this country in the summer of 2002. The only uncertainty about this sequence is whether President Vladimir Putin will be able to host the first G8 summit in Russia during the year after that.
The summits thus have their own cycle. What they do in future will depend more on events than personalities. Their focus will be on the great economic issues and institutions of the day: international trade and the World Trade Organization (WTO); world finance and the International Monetary Fund (IMF).
Some would argue that the WTO and the IMF are finished, after the anti-globalisation riots in Seattle, Washington and Prague over the last year. I do not agree. I observe that the numbers on the streets have been falling from one event to the next. The organisers of the demonstrations focused on the WTO and IMF because they could see they were soft targets. But, unless they are less intelligent than I think they are, they must realise that these institutions are not the monsters they claim. Their true enemies are Western governments and multinational corporations. That will be a more serious battle, where the adversaries are more evenly matched.
In any case, Seattle did not fail because of civil society on the streets. It failed to launch a new round of trade negotiations because the G7 countries — the United States, European Union, Japan and Canada — did not put enough on the table to satisfy the rest of the membership. All the G7 are to blame in this, though the electoral pressures in the US, even a year ago, made the American failure the most conspicuous. That explains why no definite move to start the new round can be made till the US presidential elections are over. I am reasonably confident of the prospects, whoever wins. Both Bush and Gore have given electoral hostages. But a Republican Administration will instinctively support free trade, while Al Gore is still remembered for his destruction of Ross Perot in Clinton's first campaign.
In the debate about a new round, the developing countries rightly expect the G7 members to pay attention to what they do and say. Many developing countries have opened up their markets to competition over the last ten years. They expect us, the rich countries, to do the same, in products where they have competitive advantage. Do we do so? No, we do not. For example:
It is hardly surprising that many developing countries think the world trade system is loaded against them.
It is not only for reasons of equity that we need to respond, but also for reasons of economic advantage. We in the G7 countries need another trade round ourselves. Such a round is needed to set rules and open markets in new or neglected areas of trade, where we have much to offer and the developing countries have much to gain from greater competition.
Trade in services is an obvious example. Negotiations on services have begun in Geneva this year. But they are moving slowly without agreement on a wider WTO round. In volume, trade in services has so far lagged far behind trade in goods. But it is being transformed by the spread of electronic commerce. This allows services to be supplied across borders much more easily, instead of requiring firms to establish themselves in their target market. This process is being driven by the private sector, naturally enough. But it needs a framework of international rules that will give governments worldwide the confidence to open their markets to services offered online, from financial services to education.
There may be a temptation in a country like Canada to think that the prospects in other developed countries provide more than enough business. The WTO agreements on telecommunications and financial services, concluded in 1997, both covered over 90% of international transactions. Why strive after more?
The answer is that it is unwise to put all your eggs in one basket — even one as capacious as the United States — when the potential elsewhere is so large. Ninety per cent of international transactions in telecommunications and financial services still covers less than 50% of the world's population. China's bid to join the WTO has helped to open its services markets. India is groaning and struggling, but the pressure to remove the barriers to competition is growing. I am reminded of the very old story about the two shoe salesmen who visited the Congo and sent reports back to their head offices. The first reported: "Sales opportunities here zero; no one wears shoes." The second said: "No one here wears shoes; sales opportunities huge."
I believe next year's G8 summit must focus on trade, to enable the WTO to launch a new trade round at its next ministerial meeting later in 2001. In my view the last three summits, from Birmingham in 1998 to Okinawa this year, have neglected trade because of their preoccupation with finance, ever since the Asian crisis of 1997.
Could the summits give finance a rest for the next year or two? Well, perhaps they could leave it to their finance ministers for a time. But during the 1990s there was a financial crisis on average every two-and-a-half years. So we should be due for another one soon. Of course I do not know what it will be — if I did, either you would know too or I would be very rich. But one possibility is a dollar-euro crisis, at the heart of the G7 itself. Let me speculate a bit about that — a literary speculation, of course, not a financial one.
I have always been an advocate of European monetary integration. I am a fan of the euro, but I always thought it would be a high-risk enterprise. When it started, I forecast that within six to eighteen months after the launch there would be a severe internal euro crisis, with several countries complaining bitterly about the monetary policy of the European Central Bank (ECB). But nearly two years have passed and there is no sign of any such thing. Everyone seems happy, except perhaps the Irish.
I never expected an external euro crisis. In the old days of the European currency ‘snake' and the Exchange Rate Mechanism, external pressures used to cause serious trouble. When the US dollar went sharply up or down, this affected different European currencies in different ways and they found it hard to stay together. But the creation of the euro gets rid of that problem, as it was intended to. So I am amazed to find the ECB and other central banks, including the Bank of Canada, intervening to prop up the euro against the dollar.
I find this all the more amazing because the euro is not weak because of speculative pressure. People are not selling the euro short. The rise of the dollar and the fall of the euro are in line with economic fundamentals and investment movements across the Atlantic. The United States has strong growth, low inflation and a huge current account deficit — nearly $450 billion this year. European firms are investing massively in the US, especially in the telecommunications sector, and need dollars for this purpose. These investments are very much to Europe's advantage, as well as to America's. In these conditions, a strong dollar suits the Americans very well, as Larry Summers often reminds us.
But these conditions will not last forever. When the United States has low growth and a large current account deficit, a strong dollar is an embarrassment. The events of the early 1970s and again the mid 1980s make that clear. After the Plaza Agreement of 1985 the United States was very pleased to see the dollar going down. It was helped on its way by concerted intervention by central banks. I interpret the concerted intervention of September this year as a rehearsal for the same sort of operation in the future. The central banks wanted to be sure they had not lost the knack.
So the answer is that the Europeans have to be patient, until the tide of US growth turns. Whether the Europeans find slow US growth and a weak dollar easier to handle than rapid growth and a strong dollar, we will find out when the time comes. Canadians might be able to enlighten them. Meanwhile, if there is a euro crisis, it will only be because the Europeans have created it for themselves.
I wondered whether anyone would pay attention to this analysis — after all, Britain is not even in the euro. But I was relieved to find that my interpretation of events matches closely what Eddie George, the Governor of the Bank of England, told a British parliamentary committee on 1 November. He was also asked, of course, about Britain joining the euro and had to respond with great caution.
Happily, I have no such constraints and can say what I think. I think Britain should join the euro and have always thought so. But I am afraid of Bayne's first law of European monetary systems. This law states that the longer you wait before joining a European monetary scheme, the harder it is to make a success of it. It gets both harder to decide to join and harder to stay in once you have so decided. Bayne's law applied in the 1970s with sterling and the ‘snake'. It applied in the 1980s with our attempt to have the pound ‘shadow' the Deutsche Mark. It applied in the 1990s with our brief unhappy experience in the Exchange Rate Mechanism. Will Bayne's law apply in the 2000s? I dearly hope it will not, though I fear it may. And on that cheerful note I will stop.
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