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The G7 are meeting today and tomorrow. There would seem to be plenty of room for dispute, given the recent acceleration in the yen's decline and pathetic economic performance in Europe, where the EC has recently adjusted its economic forecasts to show a deeper contraction this year and a weaker recovery next year. However, below the surface there seems to be greater consensus than it may appear.

The US and IMF have been supportive of the Abe government's efforts to reflate the world's third largest economy and explicitly recognize a role for monetary policy. Japanese officials have steered away from the earlier pitfall of providing bilateral targets for the yen's exchange rate. European officials have largely been quiet about the yen's move. This is also true of the Bundesbank, which previously expressed concerns about the Abe government's threat to change the BOJ's charter.

US Treasury Secretary Lew has made it clear in pre-meeting interviews that he will encourage Europe to balance growth with austerity. Reading between the lines, it seems Lew is more frustrated with German than Japan. Germany has the scope to provide more stimulus to help offset the consolidation elsewhere, but is reluctant to do so, in any meaningful way.

Germany's Schaeuble already indicated his line of defense. The austerity drive has been tempered as several countries, including Spain and France, will be given more time to reach their deficit targets. Italy's new government will is moving to ease the tax burden (on primary residences and appears set to delay the VAT increase). In some ways then, the U.K. government's continued push for austerity despite the largely stagnant economy stand as out as an exception.

The two traditional criticisms levied against the US are over its budget and trade deficits. The significance of both of these issues have been reduced. The US fiscal drag this year is the greatest with the G7 and the U.S. is likely to achieve a 3% budget deficit well before the euro area.

At 3% of GDP, the U.S. current account deficit is regarded by most economists as stable. One of the big structural developments has been the increase energy output in the U.S. Oil output is the highest since early 2002 and the U.S. dependence on imported oil is falling and this will impact the .U.S trade deficit directly through lower energy imports and through access to cheaper energy for domestic producers who want to in-source, like Apple and GE, and may draw foreign producers to service the U.S. market through local production rather than imports.

A smooth G7 meeting, which is largely a caucus with the G20, reinforces our sense that the major fissures are the world economy is not between countries as it was in the 1920s and 1930s, but within countries. All the major powers are in the WTO and, contrary to expectations, the no one has dropped out of EMU either. The international order seems relatively robust. Even the talk about currency wars have been played down by most officials and the IMF. Rather the main fissure is within countries and that has taken the form of austerity.

Source: G7 Love Fest