Coordination means different things to different people. Webster’s Seventh New Collegiate Dictionary defines it as the “act of coordinating,” or the “state of being coordinated,” and, perhaps more interestingly, “harmonious adjustment or functioning.” Thus, the word coordination conjures up in one’s mind the image of an orchestra that is harmoniously led by a talented conductor. In this analogy the members of the orchestra, the players, would obviously be the countries’ policymakers. It is not clear, however, who would be in the conducting role. That role could be played by the agreement reached by the policymakers at their latest summit or as a consequence of their latest consultations. Such an agreement would presumably concern only the period immediately ahead, since it is unlikely that the policymakers would or even could commit themselves for a longer period. Or, in a more permanent arrangement, the role of the conductor could be played by a set of specific rules (perhaps based on some “economic indicators”) agreed upon by the policymakers. The resolution that set up the European Monetary System (EMS) provides an example of this type of arrangement. Or even, in a futuristic world, where the national authorities have devolved some of their decision-making responsibilities to an international or supranational body, that role could be played by an international organization. In the discussion that follows, only the first of these possibilities is contemplated, since the other two do not seem realistic for fiscal policy at this time.
The connection between fiscal policy and the balance of payments has received much attention in the mid-1980s. The simultaneous appearance of the United States’ “twin deficits”—the federal budget deficit and the trade deficit—has been much discussed and debated among economists and policymakers (see Figure 1). Much of the disagreement has been about whether a causal relationship exists between the twin deficits and, in particular, whether a sharp reduction in the U. S. budget deficit is a necessary condition for a reduction in its trade deficit.