Warming Up for Williamsburg

By Charles P. Alexander

Despite a debate over floating currencies, the Big Seven vow cooperation

With its picket fences, modest cottages and colonial-era ambience, Williamsburg, Va., could hardly offer a greater contrast to the regal grandeur and formality of Louis XIV's palace at Versailles. The heads of government from the Big Seven industrial nations* are hoping that the outcome of their ninth annual economic summit, to be held in Williamsburg at the end of this month, will be equally different. Last year's summit in Versailles degenerated into bitter wrangling over East-West trade, and the leaders are desperately anxious to avoid a replay.

So when ministers from the Big Seven and 17 other non-Communist countries gathered in Paris last week for a meeting of the Organization for Economic Cooperation and Development, the spirit of harmony was carefully nurtured. The delegates issued a joint communique outlining general principles for fostering growth that could form a blueprint for a Williamsburg accord.

Nonetheless, profound disagreements remain, most notably on how to deal with gyrating currency values that have disrupted trade and investment patterns. In a speech at the Elysee Palace, French President Franc,ois Mitterrand, whose government has been shaken for two years by the falling franc, argued for an overhaul of the international monetary system to bring about more stable exchange rates. Nothing so ambitious has been tried since 1944, when representatives of 44 nations met in Bretton Woods, N.H., and established a worldwide system of fixed exchange rates that endured for nearly 30 years (see box). Said Mitterrand: "The moment has come to think of a new Bretton Woods."

Delegates from other countries greeted Mitterrand's proposal with polite skepticism. The U.S., in particular, remains a staunch opponent of systematic intervention in exchange markets.

Said Treasury Secretary Donald Regan: "I don't think we're ready for Bretton Woods II. It'll take quite a bit of discussion and arranging. It's years away."

On other issues, the ministers achieved compromise and consensus. For the first time in a decade, they agreed that inflation has slowed enough for many nations to relax restrictive policies and, in the face of stubbornly high unemployment rates, to make growth their top priority. To help revive international commerce, the OECD nations pledged to "dismantle" trade barriers and government subsidies that have shielded weak industries from foreign competition.

Unlike last year at Versailles, U.S. officials did not push the Europeans to curb trade with the Soviet Union. The U.S. case for such sanctions was weakened last week by a new report from the Congressional Office of Technology Assessment. It concluded that U.S. embargoes designed to punish the Soviets for their actions in Afghanistan and Poland had no major effect on the Soviet economy. With that in mind, the Americans settled for a vague statement that urged Western nations not to give "preferential treatment" to trade with the East bloc.

The general language of the OECD communique glossed over a spate of specific conflicts among nations. Though the delegates renounced protectionism, their governments have been quicker to build trade barriers than to tear them down. The U.S. slapped a heavy tariff on Japanese motorcycles last month, and Western Europe pressured the Japanese to limit exports of light trucks, machine tools and television tubes. American officials have made no progress in persuading the European nations to reduce the subsidies that help boost their agricultural exports.

Europeans, on the other hand, remain deeply disturbed that U.S budget deficits, which may top $200 billion annually for years to come, will slow growth and keep interest rates high. Said British Chancellor of the Exchequer Sir Geoffrey Howe: "The largest cause of high interest rates is the present and prospective borrowing requirement of the U.S. Federal Government."

France is the furthest out of sync with other industrial nations. When Mitterrand's Socialist government came to power in 1981, it made the mistake of stimulating the French economy at a time when other nations were fighting inflation. As a result, the value of the franc began to fall, plunging 34% against the dollar during the past two years. That drop made France's imports more costly and thus worsened its inflation, now running at 9%. The French have gone heavily into debt trying to defend the franc in the currency markets, and last week they had to ask the European Community for a $4 billion loan.

France's financial woes have damaged Mitterrand politically, and his call for a new Bretton Woods conference is, in part, an attempt to shift the blame for his problems to the system of floating exchange rates. But while Mitterrand's concerns about unstable currencies may be somewhat self-serving, they are shared by a growing number of prominent people. In recent weeks, Federal Reserve Board Chairman Paul Volcker, Investment Banker Felix Rohatyn and former West German Chancellor Helmut Schmidt have all talked of the need to dampen the swings in currency values. Former Secretary of State Henry Kissinger, like Mitterrand, has called for a summit meeting to revamp the monetary system.

When currencies were set free to float in 1973, many economists predicted that exchange rates would move slowly and smoothly. Under Bretton Woods, currency values had only changed abruptly after crises sparked wild speculation. In addition, experts argued that with floating rates governments would no longer be forced to restrain their domestic economies just to bolster their currencies.

The theory, however, has not performed well in practice. Speculation is more rampant than ever; currency values can jump or dip by 2% in a single day. Some currencies shoot way out of line and stay there. Japan had a merchandise trade surplus last year of $18 billion, yet partly because of Japan's low interest rates, the yen remains weak against most other currencies. Economists estimate that the yen is undervalued by about 20% in relation to the dollar.

Most experts believe that rigidly fixed exchange rates are impossible, since inflation rates vary so much from one country to another. Some argue, however, that if nations coordinated their economic policies, then currency movements could be kept within reasonable ranges. C. Fred Bergsten, a Treasury official in the Carter Administration, and Nobel Laureate Lawrence Klein of the University of Pennsylvania suggest that countries agree on "target zones" for currencies that would allow fluctuations of perhaps 15%. If a currency moved outside its zone, then governments would take concerted action to bring it back.

Others are dubious. Says Anthony Solomon, president of the New York Federal Reserve Bank: "No one knows what those [target zones] should be or how they would be enforced." Concludes Robert Solomon (no relation), a former top Federal Reserve economist: "I'm almost ready to say that the system we've got is superior to any alternative. Before we change what we have now, we better think it through pretty carefully."

In most cases, unstable currencies are merely symptoms of economic trouble, not the cause. Says Otto Lambsdorff, West Germany's Economics Minister: "The monetary system is not at fault. The important thing is the discipline of those countries operating in it." Currencies gyrate mainly because governments do not control inflation, interest rates and budget deficits. Observes Rimmer de Vries, chief international economist at New York's Morgan Guaranty Trust Co.: "It is ironic that Franc,ois Mitterrand should be grandstanding for a return to stable exchange rates. It is his country that has one of the highest inflation rates in Europe."

In the etiquette of economic summitry, it is bad form for one country to criticize too harshly how another manages its internal affairs. But to get at the fundamental causes of the world's economic troubles, the leaders going to Williamsburg will have to confront such tough issues as the U.S. budget deficit, the undervalued Japanese yen and France's inflation. If the talk is mostly of general principles and lofty goals, the summit will be more pleasant than the one last year at Versailles, but it will not be any more productive.

--By Charles P. Alexander. Reported by David Beckwith/Washington and Lawrence Malkin/Paris

* The U.S., Britain, West Germany, France, Italy, Japan and Canada.

With reporting by David Beckwith, Lawrence Malkin This file is automatically generated by a robot program, so viewer discretion is required.