Opinion | The G-7’s Economic Fantasy Summit
It’s been a busy week on the global summit circuit, with a Group of Seven confab in Germany and a conference in Madrid for the North Atlantic Treaty Organization. The two events are deeply entwined, but the leaders at the G-7 meeting didn’t much act like it.
Within the loose alliance of developed democracies, national militaries are the muscle, but the global market economy is the cardiovascular system. Military power is impossible to maintain, and security impossible to guarantee, without the efficient circulation of resources and the overall growth and flourishing afforded by the easy flow of economic lifeblood.
Alas, democracies are suffering both hypertension and high cholesterol. Hypertension takes the form of global inflation, which keeps ratcheting up the economic and political pressures within and between advanced economies. Cholesterol manifests as green-energy policies that, like arterial plaque, create blockages as they accumulate. The buildup of green subsidies and regulations has put Western economies in a perilous situation: a sudden price spike or outright shortage could cause an economic heart attack.
That in turn threatens democracies’ security interests, but still the good doctors of the G-7 mainly shrugged. Their communiqué boiled down to: “Take two aspirin, hope for the best, and we’ll see you next year.”
The aspirin is a slight abatement in the governing class’s war on fossil fuels. G-7 leaders grudgingly admitted that in light of “the current crisis,” investment in more natural-gas extraction might be helpful.
By “crisis,” they mean
invasion of Ukraine in February, which highlighted the dangers of Western countries relying on energy and other resources from Russia and other menacing autocracies. Delinking from them is proving difficult. Several decades’ worth of green policies have suppressed democratic economies’ production of reliable fossil fuels, leaving the West increasingly dependent on unreliable renewables. Hence the newfound, still tepid enthusiasm for more short-term investment in natural-gas production.
Otherwise G-7 leaders insist we “hope for the best” as they cling to so much other climate-related nonsense. That includes promises to phase out coal-fired electricity generation at the precise moment a variety of developed countries, including Germany and the U.K., are ramping it up. Renewables got their inevitable mentions, though it has become painfully apparent that they cannot carry developed countries on their own. Without advancements in battery storage, wind and solar can’t power an industrial economy.
The hope is that the necessary technologies for carbon-neutral prosperity will exist eventually, if only politicians subsidize the green transition with sufficient vigor. Unless or until that happens, the leaders of the free world will prostrate themselves before autocrats like Mr. Putin, who have no scruples about continuing to supply low-cost fossil fuels.
On the one ailment the G-7 could have done the most to treat—inflation—its answer was essentially, “We’ll see you next year.” The group ignored the issue, mentioning the I-word only once in the final communiqué, and then only to blame it on the Ukraine war. What a dodge.
The war has pushed up relative prices of energy and food. But the bigger inflationary threat arises from decisions by developed-economy governments and central banks to pump up demand during the pandemic and then to keep on pumping until very recently. Now the inflationary mayhem is spilling into exchange rates. Currency fluctuations of the sort we’ve seen in recent months, if left unchecked, are known trade and investment killers.
Some of the most useful things the G-7 in its various iterations has ever done concern exchange-rate management. The 1980s suppression of inflation and the subsequent investment boom wouldn’t have been possible without the Plaza and Louvre accords to stabilize the dollar. In 2017 finance ministers acknowledged in their G-7 communiqué that “excess volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability.” This signaled to markets a seriousness of political purpose about exchange stability, bolstering policy makers’ credibility.
Yet this resolve appears to be fading, aside from a reference in the latest summit to upholding a prior commitment to eschew competitive devaluations. The greater danger now is currency abdication, not currency manipulation, and the G-7 ought to be growing more explicit, not less, in its determination to combat a surge in the dollar, a plunge in the yen, and an oscillation in the British pound and euro. Managing economic tensions within this alliance will only grow harder the longer this state of affairs is allowed to persist.
NATO saw some realpolitik at its summit, as the alliance formally invited Sweden and Finland to join and leaders stepped up their military commitments. But this won’t do much good if the economies that must pay for those commitments have been run into the ground by policy makers stuck in a fantasy land of green energy and monetary chaos. The G-7 had one job in Germany—to get real. They didn’t do it.
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8