From All For One To Free For All

For G-7 aficionados, it seemed like old times: Finance ministers and central bankers from the Group of Seven industrial nations huddling in a crisis atmosphere. Japanese and German officials sniping at the Americans, accusing the Treasury of neglecting the dollar. And a communique--the first in more than a year--warning traders that the G-7 would cooperate closely to "reverse" the dollar's decline and return to currency values "justified by underlying economic conditions."

Yet try as they might, the G-7 leaders couldn't recreate at their Apr. 25 meeting the glory days of the world's most exclusive economic club. In the 1980s, the "lords of money" shared strong incentives, rich opportunities, and the market clout to drive the dollar down. But when Treasury Secretary Robert E. Rubin convened his counterparts at Washington's Blair House, delegates representing the world's major economies had little common interest in solving one another's currency problems.

TRADERS' TEST. The result: None of the biggest players--the U.S., Japan, and Germany--pledged to change budget or interest-rate policies to support the dollar. Currency traders are likely to test the finance ministers' mettle with a new assault on the greenback, which has already fallen 18% against the yen and 12% against the mark this year. In response, the G-7 is more likely to intervene by buying dollars. But that won't produce the "orderly reversal" the group seeks in exchange rates.

Rubin trumpeted the communique as a "significant" declaration that "the major currencies are out of sync with fundamentals." And Japanese officials, desperate to prove that they're trying to stem the super yen's ravages on the domestic economy, inflated the communique even further: Finance Minister Masayoshi Takemura described it as "of dramatic significance...unprecedented." He went so far as to compare the pact to the Plaza Accord, which coordinated the dollar's slide a decade ago. "Our determination to reverse [the yen's rise] is impressive."

Trouble is, few analysts believe that impressive action is forthcoming--or necessary. In the mid-1980s, the strong dollar caused the U.S. trade deficit to soar, triggering congressional calls for protectionism that threatened the world trading system. But despite global support for a cheaper dollar, no one country could rein in the buck without damaging its economy. So the G-7 synchronized budget and monetary policies.

Today, the U.S., Japan, and Germany face homegrown problems that require individual, not collective, solutions. "The steps that are in those countries' individual interests are also the right things to do globally," says Stanford University economist Paul R. Krugman.

Japan could benefit from lower interest rates, more government spending, and increased imports. Germany, recovering slowly from recession, needs lower rates and labor-market reform to reduce unemployment. The U.S., despite progress against the federal budget deficit, still needs to cut more red ink to ease a savings shortfall that once again is driving up the trade deficit. "For all three countries, the solutions are domestic--there's not much their G-7 partners can do to help," says John P. Lipsky, chief economist at Salomon Brothers Inc.

MUCH TO LOSE. Each country faces political and bureaucratic barriers to reform. So leaders turn to finger-pointing. Bonn and Tokyo called on Washing- ton to raise interest rates. But with the U.S. economy already slowing, Federal Reserve Chairman Alan Greenspan sees danger in doing so. He has the backing of the bond market, which figures that a weak dollar won't boost inflation. President Clinton rebuffed Germany and Japan, saying on Apr. 24 that "we aren't going to do ourselves any good to spark a recession here at home by raising interest rates."

The tensions papered over in Washington won't ease soon. Japan and the U.S. face months of economic uncertainty. By midsummer, says Kemper Financial Services Inc. economist David D. Hale, both countries may decide they need to adjust interest rates further--the Fed raising them if the economy surges again, the Bank of Japan cutting. And the dollar will be under pressure until investors see whether the GOP-controlled Congress will pay for promised tax cuts with spending restraint. G-7 or no G-7, "orderly" currency rates will have to wait until such fundamental issues sort themselves out.