THE ECONOMY

All aboard the good ship Canutic

JOCK BRUCE-GARDYNE

Lthe spring a middle-aged finance minister's fancy lightly turns to thoughts of a meeting of `05'. There was a time, not so very long ago, when gatherings of this prestigious club were shrouded in deep secrecy. The finance ministers of the Un- ited States, Japan, France, Britain and West Germany would steal from their offices late at night, accompanied by their faithful central bankers, and head off for an unknown destination. Rather like the committees of our own beloved Cabinet, even the existence of `05' was not publicly acknowledged to the hacks of Grub Street.

Such secrecy was understandable. It was not only that central bankers always shun the limelight much as badgers do. There was also the shrewd calculation that if `05' ever went high profile, then all sorts of undesirables would start clamouring for membership, and the club's treasured in- timacy and exclusiveness would be des- troyed.

Then along came Mr Baker to the US Treasury. Mr Baker is a keen advocate of megaphone diplomacy: public indictment of malingerers who decline to indulge in conspicuous consumption, publicly arrived at. He is therefore much admired by those who recall the days of old when the statesmen of the world would regularly foregather to launch us all on 'growth'. And his first achievement was to rip the camouflage off `G5' in the autumn of 1985 and to jet the international press corps into Kennedy airport to witness the club in session at the Plaza Hotel, so that the assembled money-bags could get maximum coverage for their pre-ordained conclusion that the dollar was too dear. Now the talk is of another high-profit gathering, this time in Paris, on the right side of Ash Wednesday.

The purpose of the gathering, in the eyes of the Americans at least, would be to put a bomb beneath the Germans and the Japanese. The Japanese and the Amer- icans struck a deal before Christmas by which the Japanese were to go on a domestic spending binge, in return for which the Americans would agree to stop `talking down' the dollar. The Germans declined to play. The Japanese thereupon produced a budget package which was dismissed in Washington as too orthodox by half. So Mr Baker and his friends gave the dollar another shove or two towards the gutter. Now Chancellor Kohl's Christian Demo- crats have won a further mandate of sorts from the German voters, and the message from Washington is that the time has come for action. Action, that is, from Bonn and Tokyo to slash their taxes and their interest rates. Otherwise the Americans will en- courage the dollar to go on tumbling until all of us are in the soup.

Of the other two full-time members of `G5' our own Chancellor is lying doggo. He has no reason to complain with things as they are. The pound is performing, as has been its wont, as a mid-Atlantic currency. Against the deutschemark it slithers gent- ly, which ought to put some colour in the cheeks of our exporters; while against the dollar it wins some modest brownie points to help keep imported inflation at bay. Admittedly Mr Lawson's favourite monet- ary indicator, 'little Mo', has been playing fast and loose. But since the City and the commentators have always scorned her, they should not complain if he now scorns her too (though they will).

The French don't quite know what to think. They accuse the Americans of black- mail (a funny sort of blackmail, involving as it does a willingness to pay us more for what we sell them, and to cut the price of goods they ship to us). Yet they are also painfully aware that the plunging dollar is threatening to bankrupt the European Community's farm cartel at last, and at the same time to make it very difficult for the franc to keep up with the deutschemark. Besides, they're great ones for currency targets anyway. So on balance they share Mr Baker's eagerness to bully the Germans and the Japanese into self-indulgence.

If `G5' does gather to set the world at rights they ought to read Sir Kit McMa- hon's Stamp Memorial Lecture into the minutes: For the chairman-designate of the Midland Bank has produced as elegant a plaidoyer for a return to exchange rate management as anyone could ask for. Mind you, as the last of a long line of MPs for Knutsford I draw the line at his coinage of the adjective `canutic' to describe an attempt to 'fa [exchange] rates within tight, narrow bands'.

For the last time, Sir Kit, that much maligned monarch was out to prove that the tides could not be defied. He'd have had a thing or two to say to the Group of Five. And is it really true that 'widely fluctuating exchange rates lead to protec- tionism'? I thought one of the Americans' grievances was that too many of the 'newly industrialised countries' were continuing to plunder Uncle Sam's home market precise- ly because they had pinned their exchange rates to the dollar; while another was that the Europeans persist in dumping their surplus farm produce around the globe regardless of exchange rate movements.

Moreover it is not, in my experience, unknown for Americans to complain that the Germans and Japanese are cheating, not by benign neglect of their exchange rates, but on the contrary by buying dollars and US Treasury bonds to stop the 'wider fluctuations' of the dollar.

These are quibbles. Sir Kit's essential point is that `all countries should take some account of their exchange rates in framing their overall policies — i.e. especially interest rates and not just exchange market intervention'. That must be common sense.

Only who doesn't? Oh yes, there was a time when President Reagan liked to treat the soaring dollar as a Rambo syndrome; and there was even — at a more parochial level — that weekend when we were told that Downing Street viewed the dollar value of the pound with sublime indiffer- ence. But we all get a rush of blood to the head from time to time. For the most part, floating rates or no, finance ministers lie awake at nights agonising over their ex- change rates, whether they be weak or strong. And it is only right that they should.

The key question, though, is whether a high-profile deal by the Group of Five by which the Germans and the Japanese would cut their interest rates and slash their taxes, while the Americans would stop 'talking down' the dollar would eli- minate the agony. Would the Japanese thereby become a nation of spendthrifts, and the German switch their holidays from Crete to California because the Americans had decided to cease making it cheaper for them to do so?

Or is it just conceivable that 05 would break up in mutual recrimination — parti- cularly if, as is also just conceivable, the US and the European Community had meanwhile decided to thump 200 per cent tariffs on each other's gin and feed grains?

I think I know what my old friend King Canute would have had to say. Although he might have been wrong, of course.