Business + Finance

Not-So-Great Expectations: The G-7’s Waning Role in Global Economic Governance

While the group may voice common concerns about the state of the global economy, there is no consensus about how those concerns should be addressed.

The annual meeting of the heads of the G-7 nations will take place in Japan on May 26 and 27. While the gatherings used to be major milestones in the governance of the global economic system, they have steadily declined in significance in line with the group’s waning domination of the world economy. The G-7 continues to meet as a close-knit club of wealthy countries (Canada, France, Germany, the U.K., Italy, Japan, and the United States) with similar interests, but its governance role has been largely supplanted by gatherings of more diversified groups—such as the G-20, which accounts for 85 percent of global GDP, 75 percent of world trade, and about two-thirds of the world’s population—that can make greater claim to being representative of participating countries. The G-7’s share of global GDP has fallen from 68 percent in 1992 to 47 percent in 2015. And the absence of the world’s second largest economy (China) is a glaring illustration of its “old-boy” makeup.

Common concerns, no common plan

The top economic items on the agenda for the May meeting include: a discussion of potential actions to spur global economic growth, Japan’s intervention in currency markets, and concerns over excess capacity in the steel industry. None of these are areas where the G-7 is likely to reach a consensus for meaningful action. While there is a high level of concern about the evident weakness of the global economy, options for stimulus on the monetary front are extremely limited, and there are deep divisions over any expansion of fiscal deficits. Japan and the eurozone are already actively pursuing programs of quantitative easing, with the potential for negative interest rates. Meanwhile, the Federal Reserve is on a path of likely increases in short-term interest rates in coming months. The divergence of monetary policies implies further increases in the dollar exchange rate.

A global saving glut and universally low interest rates suggest that the present is an ideal time to make a major push to expand and modernize the public infrastructure, but the member governments remain more concerned about the overall size of their fiscal deficits and are being pressured to adopt contractionary fiscal measures. Germany and the U.K., in particular, are opposed to any joint commitment to additional fiscal stimulus.

Image: Fantasy in Bavaria: G7 leaders pose for a photo opportunity before their meeting opens at Elmau Castle. Photograph: Daniel Karmann/AFP/Getty Images. 2015.

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