Slow Is Safer

A month ago, when President Ford invited six fellow world leaders to meet in Puerto Rico for a discussion of economic issues, his move was widely criticized both at home and abroad as a political ploy. The meeting was called, so went the criticism, to strengthen the President's chance of gaining the Republican nomination over Challenger Ronald Reagan. The summit did serve that purpose. Ford, who is at his best in small groups, enhanced his status as a world statesman last week by playing the charming and well-briefed host to British Prime Minister James Callaghan, French President Valery Giscard d'Estaing, West German Chancellor Helmut Schmidt, Italy's lame-duck Premier Aldo Moro, Japanese Premier Takeo Miki and Canada's Prime Minister Pierre Trudeau.

Fortunately, the Puerto Rico summit served less narrow purposes as well. The atmosphere was almost totally different from the first economic summit last November, when the leaders spent a weekend at the Chateau de Rambouillet near Paris as the guests of Giscard. Then the mood was anxious concern about the worldwide recession. This time, as the leaders talked for eight hours at the Dorado Beach Hotel, overlooking a palm-lined shore, the mood was optimistic. The only real worry was that the world recovery might be proceeding too quickly.

The warning sign is a sudden resurgence of inflation. From January through May, prices have been rising at a faster rate than in 1975 in four of the seven nations represented at Puerto Rico. The British rate, though it declined from 24.9% to 15.7%, remains ruinously high. Meanwhile, the Japanese tempo has nearly doubled, and Italy's rate has rocketed to potentially catastrophic proportions (see chart). The U.S. has reduced its rate to an acceptable level--by following politically painful policies of holding down growth and accepting a high level of unemployment.

Spiraling inflation was the major factor that turned the 1971-73 boom years into the worst global recession since the 1930s. Two of the hallmarks of the last inflation are once more highly visible: rising commodity prices (one key index has climbed 30% since last November) and sharp increases in the money supply in some countries, notably France (where it is currently growing at an annual rate of 22%).

Since a renewal of inflation could choke off the worldwide recovery, Ford was eager to get his fellow leaders to commit themselves to a go-slow approach to recovery. That is scarcely a policy that entrances voters. As Treasury Secretary William Simon put it: "Preaching moderate growth is like trying to sell leprosy." But Ford had a powerful ally in West Germany's Schmidt, a former Finance Minister who believes that combatting inflation should be the No. 1 priority among the industrialized democracies. By,contrast, Britain and Italy, which are lagging behind in the recovery, would still like to achieve U.S. and German-style growth rates as a means of reducing their unemployment.

Even so, the U.S.-West German viewpoint prevailed. The final communique stated: "Our objective now is to manage effectively a transition to expansion which will be sustainable, which will reduce the high level of unemployment which persists in many countries and will not jeopardize our common aim of avoiding a new wave of inflation."

Ice Breaking. The summit procedures resembled a well-run college seminar. With Ford as moderator, the leaders sat around a specially constructed seven-sided table. As each new topic (energy policy, Third World trade) was launched, one leader served as "icebreaker," making a brief statement that started the discussion. The leaders were flanked by their Foreign and Finance Ministers, but the aides did not speak unless invited. Usually a leader would raise his hand to signal his desire to speak, and Ford would recognize him. But Canada's Trudeau and West Germany's Schmidt, both highly forceful types, often interrupted in English.

On issues other than inflation, the leaders dealt mainly in even vaguer generalities, especially in the final 1,700-word declaration. Though energy was discussed intensely for an hour, the final document included only one sentence on the subject. "We did not want the one countries to think we were ganging up on them," explained one U.S. official. Similarly, in referring to trade problems between the developed and underdeveloped worlds, the leaders expressed themselves only in platitudes. They did, however, reaffirm their determination to complete by the close of 1977 the multilateral trade negotiations, now under way in Geneva, that are aimed at further liberalization of trade.

Belt Tightening. The leaders pondered the special problems of Italy, which has just emerged from crucial elections in which the Communists scored gains but failed to replace the Christian Democrats as the dominant party. The Western leaders obviously are eager to help Italy overcome its economic dilemma (unemployment is 7%, growth is a mere 1.5%). Yet, they want to prod the Italians into meaningful reforms and large budget cuts.

Helmut Sonnenfeldt, who is Secretary of State Henry Kissinger's chief aide, candidly declared at a press briefing that the amount of U.S. aid could not be determined so long as Italy's political situation remained "complicated." By that, he obviously meant until the role of the Communists in the nation's political life was clearer. Treasury Secretary Simon bluntly told reporters that foreign loans would "require necessary belt-tightening by the Italians." He added: "Otherwise, it would mean throwing the money out the window." Even so, Simon suggested, Italy might be allowed a "super-tranche "(meaning roughly an extra-big slice of borrowing from the International Monetary Fund), until it had surmounted its problems. Britain also came under criticism from the more prosperous nations to reduce its welfare expenditures. The British got the impression that the U.S. and Germany want them to cut outlays by $4 billion.

Own Way. Italian Premier Moro and British Prime Minister Callaghan listened attentively--but both face such sensitive political pressures at home they are not free to put the Puerto Rican summit advice into practice. Any Christian Democrat who forms a post-election Italian government will have to gain the support of the Communists for an effective economic stabilization plan. The result might be unacceptable to Western financial experts, and their refusal could push Italy farther down the path toward financial ruin--and hasten the time when the Italian Communists do come to power.

Aware of the pressures from the left wing in his Labor Party against budget cuts, Britain's Callaghan openly told his summit colleagues that "we set a series of common objectives, but we are each going our own way to achieve them." The divergence of approach may spell trouble in the coming months, but a commitment of world leaders to fight inflation is highly useful--if only it can be made to stick.

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