Global Policy Forum

By By Martin Walker

Karl Marx must be chortling in his grave at Highgate cemetery. Just whenhis principles looked thoroughly exploded, and even the 'Communist' Chinesenow want to admit businessmen to their hollow shell of a Party, his centralinsight that economics defines politics is being vindicated around theglobe.

The current economic slowdown is having dramatic political results. Thehasty revision of those over-optimistic estimates of continued Americangrowth is slashing the expected budget surplus.

The first effect has been to put a big question mark over the Bushadministration's initial plan to have some form of anti-missile defensesystem up and running during a second term. The second effect is put asmaller, but still significant question mark over the prime achievement ofthe Bush administration, that multi-billion dollar tax cut that now lookslike needing some hasty revision.

The third effect has been to set the Europeans and the Americans snarlingat each other again over currency exchange rates. European finance ministersat the G7 summit in Rome over the weekend complained at the way the strongdollar was pumping inflation into their economies -- which is why theEuropean Central Bank refuses to cut interest rates. Their Americancounterpart, Treasury secretary Paul O'Neill, grumbled that the Europeanswere not pulling their weight in tax and interest rate cuts to help haul theglobal economy out of its rut.

The dollar, having strengthened by roughly 10 percent against the Yen andthe euro since January, is becoming part of the problem. Over the past twomonths, some of America's biggest corporations, including Nike, Coca-Cola,MMM and Du Pont, have cited the over-mighty dollar pricing them out ofexport markets as a major cause of reduced earnings.

In Europe, the political effects of the slowdown are becoming plain.Eastern European countries straining every nerve to cross the budgetary andother thresholds required to join NATO and the European Union find theirrevenues stagnating as their costs rise. Poland and Slovakia find theirprivatization plans faltering in a weak market. Even prosperous governments no longer feel rich, so they are watchingexpenditure carefully. As a result, NATO is starting to despair of thepromised increases in defense budgets. This also means that thosecontroversial plans for the European Union to establish its own RapidReaction Force of 60,000 troops are looking steadily less realistic. NATOsecretary-general George Robertson, who has backed the Rapid Reaction Forceas a way to get the European members of NATO to invest in theirunder-equipped and obsolescent armed forces, warned last week that the RapidReaction Force was way behind its budgetary schedule.

"They have accomplished only about half the agreed-on projects, and theywere only the easier ones," Robertson said.

In South America, the slowdown is becoming critical. Brazil's currency hasplunged to a record low, even with interest rates at 18.5 percent. Themarkets fear that Argentina could be heading for a default on its $30billions foreign debt.

"Little by little, each engine in the world economy is shutting down, andthese countries are being choked off because they can't export and theycan't attract capital," notes Arturo Porzecanski, chief economist foremerging markets at the ABN AMRO bank.

Most of Asia is suffering from the now endemic weakness of Japan, thefirst country to suffer political turmoil as a result of the slowdown. Thenew government of maverick Prime Minister Junichiro Koizumi is pledged toforce through sweeping reforms. These include a write-down of estimated$1,000 billions in bad bank debts, which will probably make the economy agreat deal worse before it can recover. So forget about Japan acting as agrowth locomotive for another few years.

The world has entered the globalization trap, in which economies are nowso interlinked that when the United States and Japan both slowsimultaneously, the rest of the world soon follows. It is not easy, in thesenew circumstances, to see where the next spurt of growth will originate.

Thee good news is that there is a global economic management institutionthat should be able to tackle this unprecedented problem. The bad news isthat it is the G7 summit, at which the leaders of the European, NorthAmerican and Japanese economies will gather in Genoa later this month.

The G7 has never really lived up to the hopes invested in it, exceptduring that brief period in the 1980s, when then-Treasury Secretary JamesBaker managed an orderly and agreed shift in exchange rates in what becameknown as the Louvre and Plaza Agreements. Maybe this time the G7 can achievesomething similar. They certainly all have the political incentives to try,if only to stop Karl Marx from laughing his way back into our lives.

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