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Last Updated: Tuesday, 3 June, 2003, 12:06 GMT 13:06 UK
G8 dodges the deflation question
By Andrew Walker
BBC World Service economics correspondent in Evian

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The conditions are right for a resumption of faster global economic growth. That is what the French President Jacques Chirac told us at the G8 summit he has been hosting here at Evian.

There has indeed been a wide ranging debate about what is needed to revive the flagging G8 economies.

But, just as in the diplomatic talks, there was a flavour of 'don't mention the war', with leaders disinclined to dwell on two major economic wars - deflation and the weak dollar.

Deflation, or sustained falling prices, has been a painful fact of economic life in Japan, the second largest G8 economy, since the mid 1990s.

It has made consumers delay big purchases and aggravated business debt problems.

'Not worried'

There is now some anxiety that deflation might spread. Germany is most vulnerable. The US and Britain are not at high risk, but none of the G8's major developed economies can relax altogether.

And yet the concluding statement didn't mention the D-word.

When pressed about it, President Chirac said he was not worried; nor was he worried about the economies of Germany or Japan.

To be fair, many of the policy tools to combat deflation - or prevent it taking hold in the first place - are not in the hands of the G8 leaders.

They are in the hands of independent central bankers, who weren't here.

And they have made a start. The cuts in interest rates over the past two years can be interpreted as the first steps.

Subtle changes of language by the European Central Bank about its inflation objectives suggest it may now be as worried about the possibility of falling prices as it has traditionally been about inflation.

The 'absent' dollar

Even so, it is a striking omission. The G8 leaders did talk about structural reforms intended to boost underlying economic growth prospects - such as the controversial pension reforms in France and the efforts by the German leader, Chancellor Gerhard Schroeder, to overhaul the labour market.

But whatever good these might do for the long term economic outlook, they won't do much here and now.

And the leaders don't seem to have discussed the constraint posed by Europe's Growth and Stability Pact, a set of rules that restricts the government finances of the eurozone countries.

Some economists believe that, by banning very large public deficits, it prevents Germany from making tax cuts or increasing spending to pre-empt deflation.

And then there is the dollar - or rather, in the final statement at least, there it isn't.

When pressed in his final news conference, President Chirac confirmed that exchange rates had been raised during the discussions.

You wouldn't believe me if I told you they weren't discussed, he said. But the only conclusion he was able to report was that all agreed that stability was important for economic growth.

Weary ritual

The dollar's decline is a problem for Germany and Japan especially - economies in or near recession left less competitive by currency market developments.

President Bush has made the occasional public utterance in support of the strong dollar. But does it mean anything? Indeed, is it a policy at all?

This mantra to the effect that "a strong dollar is good for the United States" came out of the Clinton years.

He never pursued an exchange rate target. It was just that the circumstances of the time made foreign investors want to buy dollars to pay for US assets - because of strong economic growth and the high returns they expected to earn.

President Bush and his treasury secretaries have dutifully repeated the strong dollar incantation. But do they mean it?

There really is an air of rather weary ritual about it. And underlying that there is the suspicion that perhaps they really rather welcome the weaker dollar.

There are two obvious benefits.

American companies become more competitive. And it raises the price of imported goods - and yes that really can be helpful in the current, rather unusual circumstances, as another weapon in the battle against deflation.

Germany undermined

The bad news is that it helps the battle only in the US, where the chance of deflation happening is not very high.

The weak dollar undermines the battle where it matters most - in Japan where deflation is entrenched and in Germany, the G8 economy most at risk of catching this unwelcome condition.

But perhaps the G8 is right that things are going to get better.

The war-related uncertainty is behind us, and there are stronger signs of life in the US economy - the driving force of global growth for the past decade.

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