G7 fumbles for answers to economic volatility

At the end of their two-day meeting at Petersberg in Germany, the G7 finance ministers issued a communique, which expresses concern over the ever-rising inflation in the developed economies and the efforts to anchor inflation expectations through rate hikes. The dilemma of the finance ministers of the developed economies is about how much market forces should be the driving forces in letting the currencies stabilize, and how policy intervention is needed. In principle, the G7 finance ministers believe in the market forces, but they seem to recognize that market volatility could cause more disturbances.

Japanese Finance Minister Shunichi Suzuki hoped that the G7 would keep to its foreign exchange policy commitment of May 2017. It was stated in the communique issued after the meeting in Bari, in Italy on May 13, 2017, that “…We reiterate our commitment to international and economic cooperation, and we remain determined to use all policy tools – monetary, fiscal, and structural –individually and collectively to achieve our goal of strong, sustainable, balanced, and inclusive growth.” The yen has been sliding dangerously against the dollar and it has become a burden for Japan, though the yen has recovered somewhat. The euro too has been sliding against the dollar, and this is impacting inflation rates in these countries. Dollars remain the strong currency but too strong a dollar may have a negative impact on other G7 economies as well as the developing economies.

The Petersberg communique clearly spells out the direction and policy of the G7 countries over rising inflation rates and its spillover effects across borders. It says, “Across most G7 countries, inflation rates have reached levels not seen for decades, as a result of Russia’s war of aggression against Ukraine, which is causing substantial increases in commodity, energy and food prices. G7 central banks are closely monitoring the impact of price pressures on inflation expectations and will continue to calibrate the pace of monetary policy tightening in a data-dependent and clearly communicated manner, ensuring that inflation expectations remain well anchored, while being mindful to safeguard recovery and limit negative cross-country spillovers.”

The finance ministers of the advanced economies have acknowledged that that fiscal and monetary policy interventions have helped in coping with the disastrous impact of Covid-19 pandemic, and that it might be necessary to use intervention as a policy instrument in the wake of the Ukrainian war. Even if there was no war in Ukraine, trouble was brewing in the economies because the recovery from the economic impact of Covid-19 has not been easy, and it was slow. The war in Ukraine and the economic sanctions against Russia have made the economic situation volatile. But the markets themselves have been going haywire ever since the 2007-08 global financial meltdown has slowed down growth rates considerably. The central banks had begun to reduce interest rates and even buy assets till it became counter-productive. The interest rates had to be recalibrated, and the accumulated assets had to be shed. But the process was not complete by the time Covid-19 pandemic struck and threw everything out of balance.

It is also being realised that all the countries, rich and poor, have to prepare themselves for the possibility of global pandemics of the Covid-19 variety, and the economic resources have to be allocated to strengthen global health systems, both at the research end and the delivery end. Similarly, the long term challenge of climate change crisis is crying out for policies that will the economy away from over-dependence on fuels and the increasing emission of greenhouse gases, including large scale dairy farming and agricultural practices. It is not an easy task, and it is clear that the finance ministers of the rich countries are not really equipped to find answers for these more complicated questions.