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THE ECONOMIC SUMMIT AND THE EUROPEAN COMMUNITY

PASCAL LAMY

Bissell Paper Number Five
Centre for International Studies, University of Toronto
March, 1988

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IV. The Issue

It is instructive to briefly consider developments in the onl! three issues that have been on the agenda of every summit since the beginning in 1975. These are trade where the Community has an exclusive responsibility, monetary affairs and North/south relations.

A number of other topics tor which the Community has well developed interests have been on many if not most summit agendas -- e.g. environment and energy. Others like technology and capital markets, which are currently at the centre of Community debates. have made more spasmodic appearances on the Summit agenda.

The Toronto Summit is taking place at a critical time for the world trading system because of unusually, large tensions, resulting from the massive imbalances in the world economy and its closeness in time to a mid-term review on progress being made on important subjects in the Uruguay Round, especially agriculture.

There is now no doubt that progress is being made in reducing the current account imbalances between the major industrial countries. Very large exchange rare movements and shifts in the patterns of domestic demand have already had a noticeable effect on trade flows. These volume changes have, however, yet to be convincingly reflected in the nominal figures; and it is these which have to be financed, and which have the most visibility and hence effect on the financial markets.

Despite the improvements that have been made, the situation remains fragile. Many have asked whether it is not necessary to further modify policies so as to assure a quicker adjustment. There has also been some tendency to suggest that Europe is the missing part of the strategy. The argument goes that the US has cut its budget deficit and Japan has increased its growth rate and its imports so Europe should now do more to increase its growth rate. This argument. as well as probably giving too much credit to the permanence of what has been done elsewhere, seriously underestimates what has been achieved in Europe.

It underestimates, in the first instance, the contribution that Europe has already made to correcting the imbalances. Over 1986 and 1987 domestic demand in the four Community countries at the Summit increased by an average of 7.5 percent. compared with under 6 percent for the US. Since 1986, domestic demand in Europe has grown faster than GDP.

Moreover, the Community has made considerable progress on the structural and microeconomic side to increase its growth rate and growth potential. The most significant individual element in this is the firm and irreversible commitment to complete the internal market through the elimination of physical, fiscal and technical barriers by 1992. This program will complement the progress that has already been made towards increasing the flexibility of labour and product markets. These market adaptations are already showing up in a faster increase in employment. Unemployment, however has been slower to show progress, at least partly because of a higher level of frictional unemployment, which reflects increased structural change. The contribution of the completion of the European internal market will also give a significant boost to growth in Europe and enhance the effectiveness of macro-economic policies as well as increasing the scope for action there.

The concept of a mid-term review is fully in keeping with the spirit of the decisions that were made at the start of the Uruguay Round in Punta del Este. The Community supports it. The rendez-vous will take place in December 1988. and the Toronto Summit must prepare the ground in a harmonious way. It is, however, too early to determine the content of the mid-term review. At this stage, the important consideration is to ensure that the desire to be seen to be doing something does not interfere with the more important business of the multilateral trade round itself. If it is to be successful, which is essential to the world economy, it is important to preserve the globality of the negotiations. The final outcome of the Uruguay Round will be a compromise based on concessions made by all. over a wide range of issues. Picking off particular issues early risks reducing the scope for tradeoffs later.

The Venice Summit of 1987 reaffirmed agreement on principles for reform of agricultural systems and undertook not to introduce any new measures which could exacerbate market imbalances in the trading environment in agricultural goods. It was also agreed that negotiating proposals would be put forward. Canada, the United States and the European Community have done this.

The European Community has, for some years, been taking internal measures to reform its agricultural policy both by strictly limiting the overall amount of budgetary expenditure and by ensuring a better balance between supply and demand. Decisions taken at the recent European Council in Brussels take these moves a significant step further. The fact that it took in one year more than 45 hours of discussion among Heads of State and Government, 28 of which were in the last Summit in Brussels in February. is an indication of the political pressure that had to be brought to bear on these issues. The difficulty in arriving at final conclusions at Brussels is a measure of the sacrifices that have been made. But the solutions that have been found will not prove to be durable, if other major producers do not make comparable sacrifices. This is also one of the aspects of interdependence.

In the monetary field an important change took place between the 1985 Bonn and the 1986 Tokyo Summits. The Plaza Accord marked a move towards managed floating, and the rejection of the philosophy that getting one's own house in order is both a necessary and sufficient condition for the successful management of the global economy. It is a necessary condition but it is not sufficient. More active co-ordination is needed. Each nation's policy has not only to be well founded in a domestic context. Such policies, taken together, must be internationally compatible.

The Tokyo Summit defined a set of indicators which should be used to strengthen the process of multilateral surveillance. It also agreed that a new group, the Group of Seven Finance Ministers. should be formed. That group was instructed to work together more closely and more frequently in the periods between the annual Summit meetings to review their countries' individual economic objectives and forecasts using the agreed indicators. with a particular view to examining their mutual compatibility.

The European Community as such is not present in this Croup, mainly because the United States questioned the competence of the Community in this field. That was a questionable position at the time given certain articles of the Treaty of Rome which require member states to co-ordinate economic policies. It is even more questionable now that the Single European Act, which specifically introduces a monetary dimension into the Treaty. has been ratified.

The question of the composition of the G-7 Ministers is not considered as closed by the European Community. The Commission will raise it again with its Member States, at an appropriate time, and this time could well be close. There have recently been a number of suggestions that the initial ideas for a next stage of the European Monetary System should be revived, and a number of suggestions have been put forward for an institutional developments such as the creation of a European Central Bank.

In the meantime. monetary issues within the Community have been close to the centre of the stage. The European Monetary System, (EMS) which seas set up in 1979, has shown its ability to create and preserve a zone of monetary stability in Europe despite the turbulence in the international system. It also has been significantly strengthened by the recent agreements made at Bale and Nyborg.

The EMS has contributed to improved monetary stability in Europe in recent years. Cost and price inflation have fallen further and converged more rapidly in EMS countries than in the rest of the Community. Exchange rate variability is much lower for EMS currencies than for other major currencies. Interest rate variability is no higher than elsewhere and average levels are probably lower because of the smaller-exchange rate risk associated with EMS currencies. Most important of all, the misalignments which have so distorted the international monetary system over the past years have been totally avoided within the EMS.

The exchange rate constraint has acted as a focal point for improved policy coordination and the EMS has shown itself to be the most efficient framework to enhance multilateral surveillance within the Community. During recent years, realignments have generally been accompanied by economic adjustment measures implemented by devaluing countries. More generally, participants have gradually opted for a strong currency policy stance, thus putting most emphasis on domestic adjustment measures.

The EMS is not a rigid system. Its success derives in part from its flexibility, and ability to evolve. This it did effectively through the measures taken in September 1987 in Bale and Nyborg.

The September 1987 package agreed at Basle and Nyborg adopted measures designed to accomplish four objectives. The first was to further promote coordination of economic policies in order to reduce the threat of destabilizing capital movements. The second was to counter potential external monetary shocks. The third was to broaden the convergence process within the EMS. This is to be achieved by intensifying EMS short-term monitoring procedures against the background of a closer consensus on policy reactions to EMS strains. Furthermore, a medium-term surveillance procedure, using macroeconomic indicators in line with the Group of Seven procedure, has been established.

The fourth objective was to refine the EMS intervention and credit mechanism in order to counter the potential for larger speculative flows and to take account of the need for a more balanced use of instruments.

A reinforced EMS has allowed the Commission to present its proposals for the creation of a common financial area and the final stage of the liberalization of capital movements in the Community.

Turning the Community into an integrated financial area requires also the free provision of financial services, for which the movement of capital is often only a support. It requires that there be no discriminatory treatment, and that conditions of competition between suppliers of financial services should not be distorted by factors such as divergences in prudential regulations or excessive disparities in taxation.

A common financial area would be considerably enhanced by the wider use of the ECU as a vehicle for commercial and financial transactions, and as an international reserve asset. The increased use of the financial market would lead to the sharing of exchange risk on cross-border transactions and reduce the complexity of foreign exchange management. Just as important, the ECU's role as a reserve asset and an intervention currency would contribute to the multilateralization of the Community's external monetary relations and enhance the resilience of the EMS parity grid vis-a-vis external disturbances.

Every Summit has underlined the importance of a co-operative relationship and an improved understanding between the developing nations and the industrial world. But it probably is the most disappointing issue for summitry to prove its utility in recent years.

The issues have changed over time from concerns over export earnings and the effects of the oil price rise to a recent concentration on debt issues. But the approach has been the same. It has concentrated on support for ad hoc initiatives that have been undertaken in various bodies like the Conference on International Economic Cooperation or one or other of the UNCTAD meetings, and support for the IMF and the World Bank. But not much has been concretely achieved in this framework. The European Community for its part, has a unique relationship with the developing countries through the so-called Lome framework.

This framework is not only the main pillar of the Community's development policy but also, in the broader context of overall North-South relations is the most comprehensive contractual instrument linking regional groupings of industrialized nations and developing countries. By virtue of the number of contracting parties, the scale and diversity of areas of cooperation covered, the volume of financial resources involved and the innovative nature of some of its mechanisms -- such as policy dialogue. STABEX which is an export earnings stabilization fund, or the regional cooperation instruments -- the Rome Convention is today to be credited to a European integration which offers more coordination and more bargaining power and quicker decision making than individual member States procedures.

Since 1986, the Rome Convention has linked a twelve-member Community to 66 ACP developing countries: 45 African countries (every independent sub-Saharan African State except the Republic of South Africa), 13 Caribbean States and Pacific States.

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