8 October 2001, 10:10  G-7 See Short-Lived Slowdown, Offer No New Policy Prescriptions

Washington, Oct. 7 (Bloomberg) -- Finance ministers and central bankers from the Group of Seven industrialized nations, constrained by budget and inflation concerns, said they will not take additional coordinated action to limit the economic fallout from the Sept. 11 terrorist attacks. U.S. Treasury Secretary Paul O'Neill failed to win agreement from his European counterparts for tax cuts or additional spending, and European Central Bank President Wim Duisenberg said there is no need for another reduction in interest rates. The G-7 officials -- from the U.S., Japan, Germany, France, the U.K., Italy, and Canada -- said they expect the worldwide economic slowdown to prove temporary, and offered no policy prescriptions after a five-hour meeting Saturday. ``They had to sound upbeat, confident and in control,'' said Carl Weinberg, chief economist at High Frequency Economics Ltd. in Valhalla, New York. ``I think they are, but there's no policy insight, program or coordination, so there's not much beyond rhetoric.'' In a two-page statement released after their meeting, the ministers and central bankers said that while the terrorist attacks on New York and Washington may ``delay the resumption of strong growth'' in the global economy, ``decisive action has already been taken to support a robust recovery.'' ``We are confident about our future prospects,'' the ministers said.

Slumping Growth
The ministers and bankers promised to aid developing countries facing recessions because of the global economic slowdown, and, as always, promised to monitor developments in foreign exchange markets. They also said they would take measures to deprive terrorists of funding, saying a task force on money laundering would meet later this month in Washington to devise proposals. The officials met as the U.S. economy, responsible for one- quarter of world output, is slumping, Japan is mired in its fourth recession since 1991, and European growth is slowing. The International Monetary Fund said last week the world economy would expand 2.6 percent this year, the weakest since 1993. The IMF forecast was made before the attacks on the World Trade Center and Pentagon. All three major economic regions are expected to see growth slow further in the coming months. Since the attacks on New York and Washington, the Federal Reserve has sought to restore confidence by lowering the benchmark U.S. interest rate by a full percentage point, to 2.5 percent, and the Bush administration is working on at least $100 billion in tax cuts and extra spending.

U.S. Call for Action
U.S. officials called on other major economies to do their part to spur a global expansion. ``Every one of our countries should take the actions that are necessary for it to play a part in accelerating the realization of a stronger rate of real growth,'' O'Neill said after the meeting. Europe and Japan, which have also lowered interest rates, signaled they won't consider additional spending or tax cuts, as high debt and deficits give them little cash to play with. ``The U.S. has a considerable budget surplus, which is currently shrinking to zero; in Europe, we have deficits,'' said French Finance Minister Laurent Fabius. ``We can't use this (budgetary) tool like the U.S. does.'' Further interest rate cuts may not be in the cards either, the ECB's Duisenberg suggested. ``The level of the key ECB interest rate is seen as consistent with maintaining price stability over the medium term,'' Duisenberg told reporters. ``Our policy will not respond mechanistically to any particular indicator.''

Currency Markets
Duisenberg dismissed suggestions that rate cuts might be needed to prevent Europe from falling into recession. Europe's economy will be ``in an upward mood again'' by year's end on account of ``persistently low'' inflation, a ``sound'' balance-of- payments situation, wage moderation, and existing tax cuts, he said. The G-7 statement, which was less than one-fifth as long as the one the group released at its last meeting in Rome in July, didn't provide economic forecasts or discuss the state of the dollar, yen, euro or other currencies. ``We will continue to monitor exchange markets closely and cooperate as appropriate,'' they said, repeating a standard line. Going into the meeting, analysts thought the Japanese might ask the G-7 for help in limiting the value of the yen. It's risen 4.5 percent over the past three months, making Japanese products less competitive overseas. Japanese Finance Minister Masajuro Shiokawa, however, said there was ``no discussion of joint intervention'' at the meeting. ``We might see the yen strengthen somewhat next week,'' said Lara Rhame, a foreign exchange economist at Brown Brothers Harriman in New York. ``It may have been sold off in the expectation the G-7 would mention concern over yen strength.''

Terrorism Fight
G-7 policy makers pledged continued cooperation in their effort to disrupt the funding of terrorist groups, relying on a series of United Nations resolutions. Following the attacks on the U.S., the UN Security Council demanded UN members cease support for terrorists, deny them safe haven, freeze their financial assets, and prevent their movement across borders. All nations are required to assist each other's investigations of terrorist acts, and share information on terrorist networks. ``We will implement UN sanctions to block terrorist assets,'' the G-7 statement said. The Financial Action Task Force on Money Laundering will meet in Washington on Oct. 29 and 30 to discuss terrorism, the statement said. Task-force members include the 30 members of the Organization for Economic Cooperation and Development, plus the European Commission and the Gulf Cooperation Council. The ministers called for enhanced cooperation, including intelligence gathering, in finding and freezing terrorist assets. It also called for more cooperation among financial market regulators. ``We are going to stop the financing for terrorism,'' said Canada's finance minister, Paul Martin. ``What came out of this meeting was an implacable, not only desire, but recognition that we are going to succeed in this.''

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