Toward a Tag-Team Match in Bonn

Europe prepares to take on Carter at an economic summit

Leaders of the seven major industrial powers* will meet in Bonn next week for their fourth economic summit since 1975. Superficially, the atmosphere will be like a board meeting of a multinational corporation. In reality, the spirit of the two-day session will be more like a three-sided tag-team wrestling match.

In one corner will be the U.S., dogged by a huge trade deficit and insistent that West Germany and Japan stimulate their domestic economies to help world recovery. In another corner, Europe, led by West Germany, and adamant that the U.S. cut its oil imports to straighten out its trade imbalance and firm up the dollar. In the third corner will be Japan, embarrassed by a massive trade surplus with both the U.S. and Europe and pleading for more time to cut it back by stimulating demand at home.

In Washington, the White House support team that will accompany President Carter to Bonn completed its negotiating briefs and studied the latest economic indicators. They did not make for cheerful reading. New Government estimates published last week forecast a U.S. inflation rate of more than 7% for 1978 and lower economic expansion than previously expected (see cover). Not only was Congress still stalled on the President's energy package, but the Senate has threatened to block any draconian attempts by the Administration to impose levies or quotas on oil imports. In short, Carter will arrive in Bonn with a somewhat weakened U.S. bargaining hand.

In Tokyo, Prime Minister Takeo Fukuda announced that he expected appreciation in Bonn for Japan's efforts to reduce its huge surpluses by restraining exports and prodding domestic activity to a 7% growth. Other Japanese policymakers, however, complained that Tokyo's labors will come to naught unless Washington helps out by controlling the dollar. "It will all be in vain if the U.S. does not cooperate," said Economic Planning Agency Director Kiichi Miyazawa. "The fact that our surpluses continue to increase despite our efforts is due mainly to U.S. foot-dragging on her energy problem and inflation." (Another cause of the surplus, U.S. officials argue, is the inability of American exporters to penetrate the highly protected Japanese market.)

In Europe, meanwhile, the nine national leaders of the European Community staged a dress rehearsal summit of their own in the ancient port of Bremen, a favorite city of their host and current chairman, West German Chancellor Helmut Schmidt. After two days of sometimes chummy, sometimes quarrelsome discussions in the tapestry-lined rooms of Bremen's gabled, 15th century city hall, the Club of Nine produced a three-point package that leaders of the four big European states will offer in Bonn.

First, they drafted a new monetary scheme to stabilize international exchange rates that would reconstruct the dismembered European "snake" (which once tied all Community currencies to a narrow range of fluctuation, only to be abandoned over the years by Britain, France and Italy), backed by a new, large reserve fund.

Next, they agreed to cut Common Market oil consumption by half over the next seven years. The pledge obviously put strong new pressure on Carter to curtail U.S. oil imports as well. In return, the Europeans were prepared to offer a concession of their own--an indication by West Germany of willingness to expand its economy slightly, thus complying with a long-standing U.S. demand that Bonn pull its weight and help move the world economy toward real recovery.

Schmidt is likely to be an equally loquacious host in Bonn. Strengthened by the results of last March's parliamentary elections, French President Valery Giscard d'Estaing also has been exercising more clout. The team of Schmidt and Giscard, in fact, has raised worries among the others about an emerging "EC directorate" composed of the Community's two most powerful members.

Indeed, the important decisions at Bremen appeared to stem directly from German initiative and French endorsement. The centerpiece of the discussions was the new European monetary system, a Schmidt brainchild first brought up at a Community summit at Copenhagen last April and approved in principle by Giscard at a meeting with the West German leader in Hamburg two weeks ago.

The plan is designed to shelter Community countries against fluctuations of the dollar, as well as other currencies, and thus also help stabilize the dollar itself. Schmidt's proposal features two devices: 1) a so-called boa of currencies, which would have more leeway than the old snake to let weaker currencies, such as Britain's pound and Italy's lira, initially move up and down within a broader margin than the stronger currencies; and 2) a kind of "mini-IMF" of pooled reserves from which the members could automatically draw funds to support their currencies and deter speculation.

The proposals initially drew prickly opposition. At Dutch instigation, four small countries called a separate caucus to sulk over what they regarded as West German and French highhandedness. British Prime Minister James Callaghan, who is reluctant to inhibit the pound in any case, argued that the scheme could be construed by Washington as a move against the dollar. Schmidt proved to be one step ahead of his critics. In a series of telephone calls to Carter, he apparently succeeded in getting Washington's blessing for the monetary idea. Said a ranking German finance ministry official: "We can't see why the British should be worried about its effects on the Americans if the Americans themselves are satisfied it is not designed against them."

White House approval of Schmidt's boa is not necessarily a harbinger of sweetness and light at Bonn. The personal relationship between Schmidt and Carter has been poor and has only recently begun to improve, and the West German offer to increase growth if the U.S. moves to solve its deficit problems will probably not be enough to satisfy Washington. The President, though, will have an unexpected new argument to present to the Chancellor. The biggest source of the U.S. trade deficit is not oil but industrial imports from West Germany and Japan (see chart). Department of Commerce figures released last week showed that machinery and manufactured goods, including everything from ships and machine tools to bicycles and radios, account for twice as much of the deficit as oil does. At the same time, oil imports have so far dropped by 9.6% this year.

The Administration's case is that U.S. consumption of more goods from Germany and Japan puts a moral burden on those countries to stimulate growth at home. West Germany will not be easily sold by that argument and will contend that the U.S. import trend is only recent and largely technical. "It won't wash," scoffed a top Schmidt aide. "For both economic and psychological reasons, Washington must tighten the U.S. belt on energy." In the end, politics may help save the day. As host and European spokesman, Schmidt will be personally anxious to avoid a failure. And as a state visitor in West Germany for two days preceding the economic summit--with an overseas opportunity to brighten his dim poll ratings--Carter surely will be too.

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

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