The last G-8 meeting, held in Northern Ireland on June 17-18, failed to tackle growth-stifling trade imbalances in the world economy. That was a disappointing outcome of a talk fest which cost taxpayers about $2,000 per delegate per day.
France and Italy, with their sinking economies and soaring unemployment, had every reason to expect that they could ease the pain of their fiscal retrenchment by exporting more, as they hoped that their trade partners with large external surpluses would stimulate their domestic demand.
But these hopes were quickly dashed. A good opportunity was lost to coordinate economic policies in a way that would have supported jobs and output in the stagnating industrialized world.
(Read More: G-8 Says World Economic Prospects Still Weak)
Being a large deficit country, the U.S. could have been expected to act as a strong advocate of more balanced global trade flows. In the first quarter of this year, the American trade deficit – currently running at about 4 percent of the gross domestic product (GDP) - was a drag on economic growth. And that will get worse as the U.S. economy continues to pick up speed, while most other G-8 countries keep fighting recessions or experience tepid aggregate demand.
The best estimates available at the moment indicate that this year and next trade deficits will reduce America's economic growth by up to an entire percentage point.
The U.S. Federal Reserve, of course, is watching all that – and so should the markets – because the monetary policy will be calibrated in accordance with growth, inflation and unemployment.
G-8 Failed to Get Stimulus From Surplus Countries
How could have the G-8 helped to improve the growth outlook of the world economy?
The essential purpose of G-8 is to provide a forum for coordinating economic policies of its member countries. Over time, many other topics have been added to its agenda, but the economy remains the focal point. As the G-8 leaders emphasized in their last week's communiqué, "our urgent priority is to promote growth and jobs."
The coordination of economic policies simply means that (a) countries with low inflation, balanced budgets, trade surpluses and weak growth are expected to stimulate their economies, while (b) countries experiencing rising deficits and inflation have to restrain their domestic demand. These are clear and widely accepted rules of trade adjustment enshrined in the International Monetary Fund's charter (Articles of Agreement). There is no controversy about that.
And these are the rules the G-8 should have followed. Had they done that, this is what would have happened.