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Finance ministers and central bankers from the Group of Seven industrialized countries held one of their regular meetings last weekend in Paris. Two days of discussions produced a statement promising efforts to stabilize and stimulate their economies and a pledge to convene again in the event of an emergency. The European Central Bank indicated that it might be ready to provide additional stimulus, but this message of reassurance was undercut by the representatives’ unwillingness to use the words “war” or “Iraq,” and their failure to come up with a concrete program of cooperation in the event that fighting breaks out.

The G7 communique said that member-states were “confident in the underlying strength of our economies,” but cautioned that “geopolitical uncertainties” loomed over the horizon. That is banker-speak for war, and while the prospect is unpleasant, it looks increasingly probable. Their reluctance to say as much is not encouraging.

Economists are already factoring in the impact of war. The Organization of Economic Cooperation and Development said the world’s 30 largest economies should grow 2.2 percent in 2003, an increase of 0.7 percentage points over last year, but a significant downward revision of last June’s forecast of 3-percent growth. The International Monetary Fund worries that war could cut global growth in half, from 3 percent in 2002 to 1.5 percent in 2003. Without a conflict, the IMF believes growth could reach 3.5 percent (which is less than the 3.7 percent forecast offered last year). A recent study by an Australian think tank argues that protracted war with Iraq could cut 2 percent from global growth by 2005 and cost major economies up to $3.6 trillion by 2010. Even a short war could cut world gross domestic product 1 percent a year over the next few years; in the seven years to 2010, the estimated loss would be $491 billion for the United States, $122 billion for Japan and $157 billion for Europe.

War is not the only concern. Oil prices are climbing. Brent crude averaged $30 a barrel last month, the highest price since the fall of 2000. Each dollar increase reduces economic growth in East Asia (with the exception of Japan) by 0.1 percent directly and another 0.1 percent through a drop in export demand. Even though the war premium is estimated to add $5-6 a barrel, the real pressure on demand is being exerted by Asia’s economic recovery and slumping oil production in Venezuela.

Alarms were also sounded over the U.S. tax cut, which could reach $695 billion and threatens the U.S. with substantial fiscal and trade deficits well into the future. These shortfalls will be difficult to sustain and their impact will be felt well beyond the U.S. itself. Finally, there is ongoing concern about corporate performance. Revelations of the past year have eroded confidence in international accounting; to no one’s surprise, stock markets worldwide have been declining since 2000, and another year like the last one would represent the worst performance since the Great Depression.

The G7 representatives declared that they are “prepared to respond as appropriate” if the economic outlook weakens. While the statement listed various reforms that could strengthen growth, there is “no hidden plan,” as French Finance Minister Francis Mer confessed. The clearest indication came from ECB President Wim Duisenberg, who said he was prepared to act if required. The ECB has come under increasing pressure to cut interest rates to stimulate euro-zone economies. The U.S. has aggressively cut its own interest rates, and Japanese rates have hovered around zero for several years — but have had little impact on the nation’s economic prospects.

Europe’s room to take action is constrained by agreements that strictly limit budget deficits. There is no indication that European nations are willing to entertain the kind of large fiscal stimulus measures that the U.S. has implemented. Some governments, however, like Italy’s, have engaged in creative accounting to make the limits, and might be willing to do more to “shoulder the burden,” cloaking political weakness in the language of shared responsibility.

As the world’s two largest economies, Japan and the U.S. have a special duty to work together. U.S. Treasury Secretary John Snow told his Japanese counterpart, Mr. Masajuro Shiokawa, that “the world economy will not improve unless (the U.S.) joins hands with Japan.” That, too, sounds nice, but it is essentially meaningless until either government takes substantive action. The past — and last week’s meeting — gives little reason for optimism.

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