Famed gloomy Wall Street strategist Stephen Roach thinks he has a fix for the swelling trade and capital imbalances buffeting the global economy: More China and less Canada.
Morgan Stanley's often-provocative chief economist argues that the world urgently needs a new economic superpower club to deal with a possible collapse of the U.S. dollar -- a club that would include emerging heavyweight China, and, in a move that would bring with it a loss of global prestige, exclude Canada.
In a recent report sent to the brokerage giant's international clientele, Mr. Roach suggests scrapping the outmoded Group of Seven and creating a more muscular Group of Five.
"With apologies to my Canadian friends and a nod to the Brits, I would be so bold as to suggest replacing the G7 with a newly constituted G5 -- the U.S., Euroland, Japan, the U.K., and China," Mr. Roach writes. "The time is long overdue for a serious revamping of the global policy architecture."
It isn't that Canada is part of the economic problem, it's just that expediency dictates that only the representatives of the major currencies need to be there, he says. And Canada wouldn't be alone in getting the heave-ho from the group. For what it's worth, Mr. Roach would also bounce Italy, France and Germany individually, in favour of a single continental European membership. He doesn't even mention Russia, a special member since 1997, which stays on the sidelines of economic and financial discussions.
Many experts share Mr. Roach's concern about a possible collapse of the greenback if foreign investors -- primarily in Asia -- stop financing the runaway spending of Americans and their government.
But several analysts say a revamped G7, with or without Canada, isn't the answer. Robert Litan, a former top Clinton administration official, said countries simply aren't going to agree to a modern-day reversal of the watershed 1985 Plaza Accord.
The co-ordinated global currency intervention led to a dramatic two-year freefall of the U.S. dollar.
"You can play around with the GX all you want, call it the G3, G9 or whatever," says Mr. Litan, now the director of economic studies at the Washington-based Brookings Institution. "Regardless of what you fill in for 'X,' it's not going to make much of a difference."
The threats facing the U.S. dollar, including the swelling budget and current account gaps, are almost entirely made-in-America problems, according to Mr. Litan. "We're at fault," he said.
Mr. Litan added that G7 meetings are a convenient way for leaders to stay in touch, but they'll always be more "talk-a-thon" than venues for economic co-ordination. And no amount of hectoring from the Asians or Europeans will get the Bush administration to change its policies, he said.
Sidney Weintraub, a former senior U.S. diplomat and trade specialist at the Center for Strategic and International Studies, said overhauling the G7 might prove even more difficult than correcting any trade and capital imbalances.
"They could get rid of Canada if they wanted, but the Germans and the French would be much harder," he points out.
Canada wasn't even at the group's first meeting at Rambouillet Castle near Paris in 1975, as members talked about coping with inflation and surging oil prices. It joined a year later in Puerto Rico, invited there by the host United States and Japan as a counterweight to European dominance. Ever since, there has been sporadic grumbling that Canada doesn't belong because it's too small and too linked to the U.S. economy.
Donald Savoie, a political scientist at the University of Moncton, said being booted from the G7 would be a political and psychological blow. "It would mean the loss of a lot of credibility and prestige."
Canadian Prime Minister Paul Martin, meanwhile, has pushed hard for shifting to a larger and more inclusive group. He has pitched launching the G20, including China and India, as a way to bridge the policy gaps between developed and developing worlds.
Still, co-ordinating economic policies without smaller players in the room "makes some sense," Mr. Weintraub agrees. "There's no doubt that exchange rates are misaligned. China and several other countries are deliberately intervening to keep their currencies low."
Indeed, co-ordination of policies might well be better than some of the alternatives, Mr. Weintraub suggested. There's growing talk in Washington of more drastic unilateral and protectionist action, such as an across-the-board surcharge on imports.
Other experts say the problems of global trade and capital inequities are simply a natural outgrowth of the free market system. And intervention is the wrong way to go.
"The G7 is a non-solution to a non-problem," says Dan Griswold, associate director of trade policy studies at the Cato Institute in Washington. "You let currency, capital and trade flows find their own equilibrium. There's no crisis here."
Barrie McKenna