Two major international meetings will be held at the end of the week. Leaders from the U.S, Canada, Japan, Germany, Italy and France, the country which hosts the Summit will get together in Biarritz. The creation of such “Summits” was decided in the middle of the Seventies. Their purpose was mainly economic. At that time, the world is emerging from the fixed currencies system instituted after the war and crisis are going one after the other. So heads of States and of governments are considering it is useful to talk to each other, to get informed about the intentions of their counterparts. The first oil shock has carried heavy consequences on countries trade balances and has generated deficits. So a good coordination between the main leaders was considered as necessary. Yearly G7 meetings, which will include Russia during a short period of time, become an institution and the spectrum of the discussions is enlarged to the point they become by large focused on political issues.
The Jackson Hole meeting, located in the American Chamonix in the Wyoming, gathers governors or presidents of the major central banks and economists who are specialists of monetary policy. At the beginning, it was an idea of the president of the Federal Reserve Bank, Paul Volker, and the meetings were informal, putting together presentations made by university professors and speeches by central bankers. The globalization take-off with the opening of financial markets in a growing number of countries has made these meetings essential. They allowed these who were in charge of monetary policy of every major economic zone to have a better understanding of the intentions of their counterparts and they gave the opportunity to these ones to set out their analysis of the world economy and to give indications about their future decisions. But until a recent period, as important as they were, these discussions about the world economic situation were pushed into the background behind the meetings between heads of States and governments. That would not be any more the case this year and what will be said in the beautiful winter resort located at the entrance of the Rocky Mountains should keep more attention that the debates in the Summer capital of the Bask country.
In Biarritz, it is the usefulness if not even the survival which is in question. China and India will be formally absent and Russia is expecting its readmission. The American president will probably monopolize attention with his destroying tweets but his whole foreign policy lies on bilateral negotiations and he systematically criticizes multilateral discussions when he doesn’t withdraw his country from the organizations which are supposed to prepare these agreements. Italian Prime minister has resigned. His British counterpart is in a tough confrontation with European leaders about the conditions of his country exit. At last, the German Chancellor is weakened in his country and the coming elections in September in several lander in the former East Germany could again weaken her. Disagreements between participants are so deep that it is difficult to imagine a general reconciliation is possible. It is highly likely that no formal common declaration will be adopted, as president Macron let it understand which would be without precedent and testify of the worse situation in which international relations are.
These deep disagreements are not only showing a deterioration of political relations. They are the result of the aggravation of the economic and social situation in the related countries. When growth stays positive, the sharing of created wealth generates such inequalities that dissatisfaction increases. And when growth is stagnating, the unemployment is rising, the purchasing power falls and jeopardizing is increasing, it generates the same consequences. Electors are turning toward extremist parties or politicians for whom the quest of international agreements is not the priority. The G7 Summit in Biarritz will bring the demonstration of that.
The Jackson Hole discussions stake is quite different. Along with the constant search of a better coordination of monetary policies across the world to avoid the coming back of deep financial crisis, the issue which will be at the heart of the debates will be about the real significance, in the future, of monetary policies and about the limits of central banks action. Until now, in providing with lower interest rates and in facilitating investment and States financing, they have plaid their role in the putting in execution of economic policies. This action has, today, reached its limits with in several countries negative interest rates and in the U.S. an inversion of the interest rate curb, short term rates being higher than long term ones. To that point it must be added a political issue: aware of protecting his independence, the American central bank president will resist to Donald Trump injunctions when the condition of a more aggressive policy are brought together to avoid to the country the recession economists are forecasting due precisely to this rate curb inversion.
More generally, it is the impact of monetary policy which will be discussed in Jackson Hole. Initially, its purpose was to influence economic activity, the production and the exchanges of goods and services. It must be noticed that now the consequences of the action of central banks are much more important on financial markets than on real economy. It is necessary to take into account the limits of these policies along with continuing to have the best possible coordination between the different actions decided by the central banks and the announcements made by their executives. A wrong interpretation or contradictory and poorly justified choices could lead to major financial crisis. So, the role of such meetings as the one which is now held in Jackson Hole is to improve the coordination of the actions of these institutions.
The delivered message at the end of these meetings will include the confirmation of the working and cooperation methods of present institutions but it will also indicate their action has limits. Monetary policy cannot do everything. This principle being put forward, it will be duty of the governments to take their responsibilities regarding the support of economic activity or the prevention of recessions. It is frequently said that the current economic cycle is abnormally long. It is also because the growth rate during this cycle was abnormally low. The countries which have a balanced budget or even a surplus or a current account balance with a large surplus, must not hesitate to support their economy through a public expenditures increase or tax reductions. We reach this stunning situation turnaround. For decades, central banks have supported rigorist policies and have asked the States to moderate their use of indebtedness. This year, in Jackson Hole, we could see the emergence of a consensus to make recommendations to some countries to go in the opposite direction.
Globalization is an irreversible phenomenon, regarding both economy and finance. To denounce it can lead to short-lived electoral successes but the setting to work of policies trying to oppose it will first hurt these who thought they would take advantage of that. So it is the duty of States to adapt their economic policies to make the functioning of the world economy less unequal. Globalization makes also necessary to adapt monetary policy to this new environment. If we can be sure that, in Jackson Hole progress will be accomplished in the understanding of the twin necessity, a lot is to be done in order that these which will have met in Biarritz understand that they must proceed to this turnaround and make globalization fairer.