FINANCE MINISTERS AND CENTRAL BANKERS AGREE ON CUTTING DEBT, BUT NOT MUCH ELSE

The meeting of G20 finance ministers and central bank governors, held in Paris on February 18-19, 2011, was a small success for this new model of global governance and got France’s year as host and chair of the G20 off to a sound start.  The ministers and governors came away from Paris with a clear work plan to accelerate the hard work of addressing currency volatility and global fiscal imbalances. Christine Lagarde, France’s impressive finance minister, should get much of the credit of course. So should the Germans, who supported her views.

Their most impressive achievement was to confirm the G20’s commitment in Toronto last June: That advanced economies in the G20 will cut their fiscal deficits in half as a share of gross domestic product by 2013. This alone should offer some relief to bond markets that are skittish over sovereign debts across Europe and from U.S. states. The ministers and governors also called for “appropriate monetary policy” – a subtle dig at the U.S. policy of looser monetary policy – and encouraged “enhancing exchange rate flexibility,” an equally subtle dig at China’s stubbornness around its fixed exchange rate.

But the group didn’t get quite as far in settling on ways to measure the fiscal imbalances that define the world’s financial dynamics.   Only after much effort did the G20 even agree on the low standards set by introductory economics textbooks. They decided, again in accordance with the “Toronto terms”, to measure public debt and fiscal deficits first, the private savings rate and private debt second, and the “external imbalance composed of the trade balance and net investment income flows and transfers” third. The convoluted language on the third point allowed a reluctant China to save face, as did the agreement that this work would be done “taking due consideration of exchange rate, fiscal, monetary and other policies.” All members could breathe a sigh of relief and move on to the more next difficult step at their next meeting in Washington in April.

A more innovative achievement came on accountability. The G20 directly declared: “We will also review an assessment of progress made in meeting commitments made in Seoul.” To be sure, the G20 still looked to bodies they controlled to do this and other monitoring and compliance assessment tasks, rather than transparently trust outside, independent, authoritative assessors that market participants and citizens might better believe. Still, this small move in the right direction might help ensure that the slow, hard slogging needed to fulfill several key commitments would actually produce the required results.

Elsewhere on the G20’s “built-in” agenda there were few real advances and much left out of the communiqué. The G20 offered the proper and rather prosaic passages on commodity prices and food security but mobilized no new money and did not integrate its approach to that question with its approaches to economic governance, climate change, development and health. The pronouncements on financial regulation and reform touched on much but still ignored the need for globally convergent accounting standards, required to ensure that all could understand and trust the arithmetic used everywhere else. The ministers’ desultory language on trade dropped their leaders’ commitment to fight protectionism.

The passages in the communiqué on development ignored the innovative Seoul Summit addition controlling non-communicable diseases (NCDs), a step needed if the development of poor countries and poor people in emerging and developed countries is to be achieved. The G20 finance ministers thus missed an important opportunity to support the United Nations, which will hold a high-level meeting this coming September to address the global challenge of the killer NCDs of heart disease, cancer, diabetes and lung disease. Unless these are controlled, too many people will die unnecessarily. Moreover, G20 countries will struggle to control the soaring healthcare costs that are a critical component in achieving fiscal consolidation goals. Also absent was an endorsement of the UN’s Millennium Development Goals, a cause G20 Leaders had supported at their Seoul summit just last fall.

Another disappointment arose on climate change. Here the G20 finance ministers and governors ignored their leaders’ innovative commitment to phase out fossil fuel subsidies made at the Pittsburgh Summit in 2009.  This omission came right on the heels of a report by the International Energy Agency that governments globally, led by G20 members such as India, could save over $300 billion a year if they did just that.

The G20’s Paris communiqué did end on a promising note. It proudly and properly pledged to support Egypt and Tunisia’s “reforms designed to the benefit of the whole population.” For a G20 club that includes non-democratic Saudi Arabia and China, this was an important affirmation of support for the democratic revolutions sweeping across the Middle East and North Africa.

 

RELATED MATERIAL FOR THE WEEK OF FEBRUARY 28

BACKGROUND

At the G20 Finance Ministers’ Meeting this past week, the word of the hour was “indicators.” Indeed, the main, though certainly not the sole, challenge facing finance ministers and central bankers at the meeting was determining which indicators ought to be used to measure “global imbalances,” a heretofore undefined term. According to Reuters, “Ministers and central bank governors agreed on a list of indicators including public debt and fiscal deficits, private savings and borrowing, the trade balance and other components of balance of payments such as net investment flows.” However, the Chinese delegation insisted that currency reserves not be included among those indicators used to measure imbalances, a move that left many delegations, including that of the United States, somewhat dissatisfied.

G20 finance ministers and central bank governors met for the first time in 1999, after the 1998 financial crisis in Asia drove home a reality that globalization and the increasing inter-connectedness of global financial markets had raised the risk of contagion in times of crisis, and that a new global cooperative framework was necessary to secure international financial stability. Since the inaugural meeting in December 2009, G20 finance ministers have met annually to discuss new and continuing approaches for building greater cooperation in global finance.

Until 2008 and the global financial crisis, G20 finance ministers were the only representatives of the G20 to meet together on a regular basis.  However, in December 2008 G20 leaders assembled in Washington for the first time in response to the emerging global financial crisis, and have continued to meet to promote recovery as well as prevention of future crises. G20 finance ministers have continued to play a crucial role in preparation for leaders’ summits, including setting the leaders’ summit agenda along with the personal representatives of the leaders – the Sherpas, discussing controversial economic issues in advance of the summit, and initializing the consensus-forming process among state representatives.

The compromises finalized last week laid the foundation for broader efforts to strengthen the international economic system, but much remains to be done before the next G20 finance ministers and central bankers meeting in April. The next step, as acknowledged in the meeting’s communiqué, is drawing up indicative guidelines that will set standards for determining the extent of global imbalances across G20 members. The ministerial meeting’s communiqué also included commitments regarding ongoing reform of global financial markets, particularly standardizing OTC derivatives markets, regulating globally significant financial institutions (G-SIFIs), and reducing reliance on credit rating agencies’ ratings. Other commitments of note include those regarding the international monetary system, tax havens, and a commitment pledging solidarity with the people of Egypt and Tunisia.

RELATED MATERIAL

  • Reuters has compiled a list of highlight quotes from officials at the end of a G20 finance ministers meeting, which reached a compromise agreement on imbalance indicators. Reuters has also created an interactive graphic outlining where G20 states stand with respect to some of the indicators drawn up this past week.
  • Also from Reuters – in this video, Andrew Cooper reports on the G20 ministers’ talk about inflation and imbalances in the global economy.
  • The G20 Information Centre – created by the G20 Research Group – holds analysis, communiqués and critical commentary by experts on the G20 finance ministerials. Furthermore, John Kirton, one of the G20 co-directors was quoted in Business Week in an article on the run-up to the meeting and is responsible for the Feature of the Week above on the G20 meeting. Kirton is director of the G8 Research Group and along with Alan Alexandroff and Donald Brean Kirton is a co-director of the G20 Research Group.  The G8/G20 Research Group can be found at the Munk School of Global Affairs at the University of Toronto.
  • The Basel Committee on Banking Supervision, the Financial Stability Board, and the International Monetary Fund have contributed research and policy options to members of the G8 and G20 summits.
  • The Centre for International Governance Innovation, provides detailed commentary on the G20 summit proceedings.