With a focus on Global South, the war in Central Europe, trade embargoes and sanctions, the Group of Seven -- the West’s key economic and political forum -- will deliberate in its standard framework of “liberal democracies vs. autocracies” during the meeting in Italy on June 13 – 15, 2024. Put simply, that will be a discussion centered on West against Russia and China.

The crucially important business of economic policy coordination within the trans-Atlantic community will be given a short shrift.

That’s understandable. The governing U.S. Democrats apparently think that heavily indebted, unstable, and recessionary economies offer no election year talking points. But getting tough on Russia and China, they reckon, is a much better bet while showing a firm leadership of a Western alliance determined to fight the usurpers of a “rules-based” world order.

France and Germany, the key European G7 members, are happy to follow that party line because their weak economies are facing parliamentary elections (June 6-9, 2024) with a groundswell of nationalistic and populist Eurosceptics.

Normally, the forthcoming G7 meeting should call for a concerted trans-Atlantic stimulus package to rev up the weakening U.S. economy, and to stop and reverse the recessionary bias to growth and output in the European Union.

No space for economic stimulus

Sadly, the economic mismanagement has left no policy space for such decisions.

The U.S. fiscal constraints are now more binding than anytime in recent history. The budget deficit is literally stuck at 8% of GDP, and the public debt is expected to soar next year to 130% of GDP from this year’s estimate of 125.4% of GDP.

On the monetary side, the real policy interest rate of 2% (federal funds rate of 5.33% minus the 3.4% CPI for April) is roughly neutral – and that’s the way it should be in view of unstable inflation and economic activity.

The U.S. inflation is a generally underestimated problem. The core inflation (the CPI less food and energy prices) has stabilized slightly below 4%, but the service sector inflation has accelerated to 5.3% -- a serious problem in an economy where services account for 90% of total demand and output.

As a result, high inflation, high (and rising) public debt and excessive budget deficits allow no interest rate cuts to stabilize the economy – even though the GDP growth slowed down to an annual rate of 1.7% in the first quarter of this year from 4.1% in the previous quarter.

That is a typical problem encountered by the monetary policy.

Inflation remains high, although the economy may have already entered an irretrievable downturn. And by the time inflation begins to recede the economy is in a worsening recession.

That happens because monetary policy operates with long and variable lags, where it may take two to six quarters for interest rate changes to affect demand, employment and prices.

An example of that can be seen in U.S. business surveys published last month. They showed a contracting activity in service and manufacturing sectors, with declining production, new orders and employment. In spite of that, prices in both sectors continued to rise considerably.

Global South is a BRICS province

The E.U. is a much simpler case. With no growth in the twelve months to the first quarter of this year, an unemployment rate of 6%, inflation rate of 2.4%, budget deficit of 3.5% of GDP and public debt of 82% of GDP, there is quite a bit of space for monetary and fiscal policies to stimulate economic activity and employment creation.

So, being a full member of the G7, the E.U. should contribute to the group’s stronger economy.

Instead of that, the E.U. is asked by Washington to sanction trade and investments with Russia and China, and to step up financial aid and arms deliveries to fuel the third world war.

The E.U. needs no pressure to cut trade with Russia. They have done that already.

The booming China, however, is a different story. The IMF just completed its China Article IV consultations by raising this year’s growth estimate to 5% from 4.6% -- and leaving room for an even stronger growth based on its positive assessment of Beijing’s economic management.

The E.U. countries like Germany, France, Spain and Hungary may, therefore, be reluctant to follow Washington’s sweeping China trade tariffs and sanctions, or to antagonize Beijing with friendly gestures toward Taiwan. Germany, in particular, is an unlikely Beijing-basher because it is betting the future of its automobile and chemical industries on China.

Similarly, the G7’s rapprochement with the Global South is a tall order. China, India and Brazil are firmly entrenched in the world that represents 90% of humanity.

The best the U.S.-led G7 could do is to put its own economy in order. It should also make sure that the dollar-based international system of trade and finance is supportive of global growth and employment – with poverty alleviation in the struggling developing nations.