Economics to Top G-7 Agenda for First Time : Summit: Without Soviet threat, once-dominant security issues are likely to take a back seat at Munich.

WASHINGTON —  When the senior management of the global economy gathers in Munich this week, it may be remembered as the first time that economics really dominated the deliberations at a Group of Seven economic summit.

While world leaders always talk a good game about economics at summits, Cold War security issues have usually taken precedence. After all, what president or prime minister wouldn’t rather look statesmanlike by talking about missile throw-weights or Soviet incursions in the Third World, instead of getting bogged down in the minutiae of steel import quotas or European corn subsidies?

But now, for the first time since the economic summits began in 1975, the G-7 will meet without the Soviet threat hanging over their discussions--and, thus, without the Cold War glue that held the West together for so many years. While that is certainly good news for the world, it may have an unintended side effect on the summit process, forcing the leaders of the United States, Britain, Canada, France, Italy, Germany and Japan to talk about the economic issues they are supposed to discuss at these summits.

Even the discussion of the West’s proper response to the Soviet Union’s collapse, which is likely to dominate the public statements coming out of the Munich summit, is really an economic debate over how to structure and share the burden of financial aid to Russia.

Yet the collapse of communism has also eliminated any overriding security reason for the G-7 to present a united front to the world on economics and other matters. Indeed, Robert Hormats, former Jimmy Carter Administration international economist, noted that, while the G-7 should function as the world’s “economic security council,” it almost never does.

So at Munich, the G-7’s challenge will be to maintain an effective international alliance, despite their deep divisions on trade and economic affairs that are now more likely to be aired in the open.

“The Munich summit is really the first gathering of the industrial world since the collapse of communism, and so it is one of the first tests of this new era,” observed Fred Bergsten, an economist at the Institute for International Economics in Washington.

Added one senior Canadian official involved in the preparations for Munich: “I think the credibility of the summit process is at stake in how they deal with economic issues this time.”

The new primacy of economics comes at a time when Washington is exercising a diminished leadership role within the G-7. Japan and Germany are now assuming nearly equal status with the United States, a fact of geopolitical life that seems certain to hamper the Administration’s negotiating position in Munich.

Although the Japanese and Germans may make symbolic gestures of support for President Bush, observers say they are likely to avoid any fundamental changes in their economic policies that might be designed to help stimulate the American economy, and, thus, bail out Bush before the November election. Unable to reach agreement on fundamental economic problems, G-7 leaders may ultimately fall back on security issues, most notably the Yugoslav crisis, to create some semblance of international accord.

But if the G-7 reverts to form and seeks comfort in such security issues, it would mark a fundamental failure of leadership by both the Bush Administration and the Western industrial powers as a whole, many observers believe.

“You know, in this new world order that George Bush has talked about, this ought to be a process by which decisions could be made among the big players in the economic scene,” said C. Michael Aho, director of economic studies at the Council on Foreign Relations. “I’m not sure we’ve seen that of late.”

Of course, the middle of a worldwide downturn is not the best time to reach international consensus on economic matters. In fact, Bush and the other world leaders at the summit face seemingly intractable problems just when economic issues are at the top of the domestic political agenda in virtually every major industrial nation.

Already, bitter trade disputes--between America and Japan and between America and Europe--are jeopardizing ongoing global trade talks and spurring development of rival trading blocs.

While the Bush Administration wants the trade issue to be a focus of debate in Munich, the host Germans are reluctant even to put the issue on the table. Trade negotiators did renew intensive talks in the days leading up to the summit.

But few observers predicted any major breakthrough. “If I could wave a magic wand over one issue and get it resolved in Munich,” it would be the global trade negotiation, said a frustrated Treasury Secretary Nicholas F. Brady.

Yet, if trade is forgotten at one more summit, economists warn that Europe, North America and East Asia may, in the meantime, begin to develop trading zones that could ultimately divide the G-7 into warring, protectionist camps. Bush cautioned against this in an interview with foreign journalists last week, saying, “America’s economic interests don’t stop at the water’s edge, and we will not prosper in a world stifled by trading blocs and tariff barriers.”

But of greater worry now in the White House is whether Bush will be handed any election-year gift by the allies that might help make the American economic downturn disappear.

Just days before departing for the summit, Bush was hit with the stunning news that the nation’s unemployment rate had soared in June to 7.8%--its highest level in more than eight years; this raised the threat of a “triple-dip” recession in the middle of a volatile presidential election campaign. Rarely has an incumbent President faced such a harsh economic outlook during an election stretch drive--and survived for another term.

Bush got some help from the Federal Reserve Board last week, when it slashed American interest rates to their lowest levels in nearly three decades.

Bush would like more stimulative policy proposals from the Europeans and the Japanese to help boost world economic growth and, thus, indirectly buoy U.S. exports and employment.

An announcement of a coordinated interest-rate reduction in Munich--or of some other specific stimulative package--would also send a powerful political message back home. It would give Bush a chance to play up one of the key themes of his reelection campaign: that his foreign policy prowess is of immeasurable benefit to the American economy.

Brady set the stage for such a Bush request at Munich last week, when he told reporters in Washington that inflation worldwide is now so low that global interest rate cuts and other anti-recessionary programs should be in the works by G-7 members.

Brady stressed that the Americans in Munich will attempt to capitalize on a growing awareness among the G-7 leadership of the “need to maintain world growth.” But while the Americans will certainly make that a central issue in Munich, the Japanese and Europeans are almost certainly not going to give Bush what he wants.

Last week, Japanese Prime Minister Kiichi Miyazawa came to Washington and disappointed the Administration with his paltry economic offerings. Japan announced that it would boost domestic government spending--a measure supported by the Administration as a means to indirectly stimulate Japanese consumer demand for foreign products at a time when Japan’s trade surplus with the rest of the world is hitting new records. But Miyazawa refused to bend to American pressure and provide any specifics on his fiscal package.

Meanwhile, the Germans seem unwilling to do much to bring down their high interest rates, one of the key reasons European economic growth has stalled. The fiercely independent German Central Bank, which dominates European economic affairs, has kept rates up in response to Germany’s widening, post-unification budget deficit.

With an eye toward the upcoming summit in his own back yard, German Finance Minister Theo Waigel last week announced a tight new federal budget to prod the Bundesbank to cut rates. But the Germans seem reluctant to do more for Bush while he is in Munich, especially since Bush has failed to address his own massive budget deficit.

“It is awkward for George Bush to criticize (German Chancellor Helmut) Kohl about his deficit; it is kind of like the pot calling the kettle black,” noted economist Bergsten.

Aid to Russia may be one economic issue on which progress is made in Munich.

Russian President Boris N. Yeltsin will be at a G-7 summit for the first time and is expected to be greeted much more warmly than was his predecessor, former Soviet President Mikhail S. Gorbachev, who attended the London Economic Summit last year.

With the Soviet Union now history and Yeltsin proving to be a steadfast political and economic reformer, the United States and its allies believe they must provide Yeltsin with tangible support that he can take home.

Western leaders remember all too well that their failure to grant new assistance to Gorbachev in London weakened him at home and may have helped set the stage for last August’s coup attempt. “In Munich, we want to make sure that we have multinational support for Yeltsin,” a senior Administration official said last week.

With the G-7 already committed to $24 billion in economic assistance to their former adversary, a key question facing the West in Munich is just how quickly and in what form the aid should be released to Yeltsin’s government.

A partial answer to that question came late last month, when the International Monetary Fund, with Administration encouragement, agreed to advance $1 billion in aid, even though the international lending agency has not reached a final agreement with the Russians on economic reform. The IMF had previously demanded that the Yeltsin government complete work on a reform package before the aid would be released.

The full package of Western aid includes $4 billion in borrowing from the IMF, a $6-billion IMF stabilization fund to help in the conversion of the ruble and $14 billion in aid from the United States and other individual Western countries. Further advances on that aid are likely to be announced in Munich or shortly afterward, American and G-7 officials say.

One form of Western assistance expected to be announced at Munich will be a coordinated G-7 effort to help the Russians and the former Soviet satellites in Eastern Europe deal with the threat of serious accidents at the poorly designed, Soviet-produced nuclear reactors still in operation. Because of fears of a repeat of the 1986 Chernobyl catastrophe, a German-sponsored plan is likely to be unveiled in Munich, calling for a $680-million, five-year program to improve the reactors’ safety.

Bush even suggested last week that, when he meets with Yeltsin, he may discuss the possibility of transforming the G-7 into the G-8--with Russia as its newest member. “The Russian economy is enormous, and they have big problems, but their size gives them a unique standing,” Bush said.

To give Bush something tangible to take to Yeltsin, the Senate on Thursday approved an Administration request for further aid to Russia. The bill would grant $1 billion in new assistance to Russia, as well as the other former Soviet republics, over two years.

Despite political concerns that the United States should be scaling back foreign aid when there are so many economic problems at home, the House is also expected to approve the assistance package later this month.

Of course, when push comes to shove, it is still quite possible that this economic summit could once again be overwhelmed by military and security issues. Senior Administration officials said late last week that they expect that the Yugoslav crisis will “dominate the political discussions in Munich” but promised that it would not take the spotlight away from economics.

But others aren’t so sure, especially since U.S. aircraft are expected to be flying relief supplies to starving Sarajevo under the U.N. peacekeeping umbrella while Bush is in Europe.

“The summits,” economist Hormats said with a sigh, “almost always get swamped by everything but economics.”

What Does Yeltsin Want?

Although Russian President Boris N. Yeltsin has visited all but one of the Group of Seven major industrial nations in the past year, he will meet their leaders together for the first time in Munich this week.

The Russian Wish List

* Confirmation of the $24 billion the Group of Seven promised Russia in April. So far, only small amounts of money have been released, largely credits for agricultural and other purchases and money to pay for old purchases.

* An easing to the conditions for the assistance--slower economic reforms, continued energy subsidies, a larger government budget deficit. He will warn the leaders of the world’s top industrialized nations that Russia’s economy must be stabilized before it can move from socialism to full, free-market capitalism.

* Debt rescheduling, so that Russia need not repay money--about $65 billion--that it borrowed before 1991, and the past interest due on it, for three to five years. Russia has $10 billion in debts due this year that it cannot pay.

* Further credits to import medicines and food next winter.

* Removal of final Cold War trade restrictions and steps to encourage private investment in the Russian economy.

* Western advice and technical consulting on Russia’s economic transformation.

What to Watch

* How far President Bush goes in supporting the Russian leader? The United States has been one of the most reluctant Group of Seven members in providing massive aid to Russia. Will Bush swing toward Russia following Yeltsin’s visit to Washington last month? Or will American domestic needs take precedence?

* How successful will Yeltsin be in wooing Japanese Prime Minister Kiichi Miyazawa? Japan refuses to provide more than humanitarian aid to Russia, while the Russians hold the four Kurile Islands, seized by the Soviet Union at the end of World War II.

* How will the Russian leader comport himself in such high-powered company? Yeltsin banished the old image of “Boozin’ Boris” during his American trip last month. But he has not yet developed a new international persona with which to define what he calls “democratic Russia.”

Who They Are

* The Group of Seven nations: United States, Japan, Britain, Germany, Italy, France and Canada