From "the Factory of Ideas" (Archive)
Dilek ÖRNEK, Senior Expert, TÜSİAD External Relations Department
Introduction
At the G20 Summit quaked by Papandreou’s decision of holding a referendum for the saving plan of EU, the agenda of the summit got overshadowed by the Euro crisis. The opening day of G20 Summit on November 3rd, 2011, Nicolas Sarkozy and Angela Merkel uttered their reaction to the referendum decision by meeting with Papandreou.
Just before the G20 Summit, on 2-3 November, 2011, the course of working groups and roundtable meetings of B20, especially which were on economy and finance, were focused on the Euro crisis in a panic stricken mood.
In order to surpass the Euro crisis, the proposal of “using SDR (Special Drawing Rights) to provide affordable credits for the crisis-hit countries” suggested by both B20 and several EU countries got stuck at the German barrier (1). Thus at the end of G20 Summit, although extension of the supervisory capacity of IMF and cooperation with European Financial Stability Facility (EFSF) were concerted, a concrete resolution for the crisis management was not achieved.
1) What did B20 asked for?
B20 final report was shaped and prepared by pre-Summit studies of working groups. One of the main issues that this report undertook was of course examining how to reboot the flagging recovery of the global economy. In this sense, three priorities in the final report of G20 countries’ business were stated as follows:
1) Adjusting global governance to the new realities to strengthen confidence,
2) Unlocking the levers of economic growth,
3) Ensuring that the benefits of global growth are sufficiently shared to be sustainable.
The suggestions for G20 in order to achieve these three objectives could be summed up as follows:
Global Governance
- Improve the consistency and continuity of actions of G20 by developing a transparent, multi-year, integrated agenda and by continuing to organize appropriate consultations with relevant stakeholders before making decisions,
- Increase the weight of emerging economies in the key international institutions such as the International Monetary Fund,
- Increase the effectiveness of institutions like IMF and the International Atomic Energy Agency through extended mandates,
- Encourage the convertibility and flexibility of relevant currencies for trade and investment for a stable and multipolar international monetary system (an insinuation concerning China),
- Support the business efforts to address hedging challenges by ensuring that regulations do not hinder the use of hedging instruments, by enlarging the special drawing rights (SDR) basket, increasing the SDR’s role as a reserve currency, and finally by developing private use of SDR’s.
Economic Growth
- Make governments with large structural deficits rapidly reduce fiscal imbalances to manageable levels and develop public-private partnerships,
- Make trade and investment a permanent item in the multi-year agenda of G20,
- Promote long-term private financing of job-creating activities,
- Avoid barriers to trade and investment and ensure stable regulatory regimes in commodities, raw materials and energy markets, increase commodities markets transparency, remove harmful price subsidies,
- Foster flexibility and flexible forms of work in labour markets, promote global skills transfers and mobility, and develop real and effective public-private partnerships to identify and work together to meet job needs, skill gaps and education requirements,
- Put a price on carbon, free trade in green goods and services, harmonize rules pertaining to information and communication technologies (ICT),
- Enhance G20’s existing peer review mechanism for evaluation of anti-corruption programs to include meaningful private-sector consultations and input.
Development
- Efforts to reach the Millennium Development Goals (MDGs) should be redoubled not only for their own sake but also because development is potentially a massive source of global growth, as it will include new populations in global trade. Hence, foster public-private partnership in food security and infrastructure development,
- Improve the efficiency of food and agriculture markets through implementing policy reform (including ending export restrictions) ; improve productivity, in great part through increasing investment from public and private sources by 50% by 2015.
2) What is resulted from G20 Cannes Summit?
Within the G20 Final Report, subjects undertaken by B20 working groups were touched upon by lining up a series of “intentions” towards global governance, development, anti-corruption efforts, liberalization in multilateral trade regime, green economy, improving the functioning of energy markets, reducing food price volatility, increasing agriculture production and productivity, implementing and deepening financial sector reforms.
An Action Plan document is composed as for growth and labor. Short-term and medium-term commitments that stand out in this Action Plan are conceived as follows:
- It will be ensured that banks are adequately capitalized and have sufficient access to funding to deal with current risks.
- Economic and fiscal surveillance and governance of the euro area is agreed to be significantly strengthened.
- A particular effort in terms of fiscal consolidation and structural reforms will be made by those euro area Member States that are experiencing tensions in sovereign debt markets.
- Italy commits to reaching a rapidly declining debt-to-GDP ratio starting in 2012 and close to a balanced budget by 2013. (IMF will carry out a public verification of Italy’s policy implementation on a quarterly basis)
- The US commits to the timely implementation of a package of near-term measures to sustain the recovery, through public investments, tax reforms, and targeted jobs measures, consistent with a credible plan for medium-term fiscal consolidation.
- Japan commits to the expeditious implementation of substantial fiscal measures for reconstruction from the earthquake. Moreover it will gradually increase the consumption tax to 10% by the middle of this decade.
- France commits to reducing its fiscal deficit to 3% in 2013 through: tighter limits on central government and health insurance expenditure; better targeted social transfers; a growth-friendly reduction of tax expenditures.
- India commits to strengthening revenue mobilization through tax reforms.
- Germany will implement measures to promote private consumption and investment.
- China will rebalance demand towards domestic consumption by implementing measures to strengthen social safety nets, increase household income and transform the economic growth pattern.
Besides, much more structural reforms towards enhancing production are projected and commitments in terms of countries are defined. Within the Action Plan, energy is the only domain concerning Turkey.
Steps in the Action Plan expected from countries about the reforms towards increasing production:
• Infrastructure investment (Brazil, India, Indonesia, Mexico, Saudi Arabia, South Africa),
• Supporting research, education and skills development and eliminating tariffs on machinery and manufacturing inputs (Canada),
• Reform of pricing for factors of production, promote market-based interest rate reform in an orderly manner and gradually achieve RMB capital account convertibility as stated in its current 5-year plan (China),
• Structural reforms in the services sector to boost productivity (France, Germany, Italy, Korea),
• Tax reform aimed at a more employment-friendly taxation (Germany, Italy),
• Raising standards of disclosure of information by financial institutions (Russia),
• Phasing out wasteful and distortive subsidies in the medium term, while providing targeted support for the poor (India, Indonesia),
• Reforms to energy efficiency and greater use of renewable and domestic energy resources (Turkey),
• Agriculture (Argentina),
• Enhanced regional integration to promote trade and investment (South Africa),
• improved practices and enhanced oversight of the short-term financing markets and reforms to help promote a rise in household savings as a share of GDP (US),
• transitioning to a clean energy economy through effective carbon price mechanism (Australia), and
• efforts to promote green growth (Korea).
3) Technical Follow-up of G20 Summit Decisions
IMF prepares assorted reports in order to survey the implementation of G20 decisions and the process.
At the 2009 Pittsburgh Summit, implementation of Mutual Assessment Process (MAP) towards the consistency of growth targets evaluation was agreed upon.
In this context, the IMF –working with other IFIs- was asked by the G-20 to provide a series of assessments on these issues for an enhanced MAP, to assist the membership in pursuit of its goals. The main component reports from IMF staff consist of the following:
- An Accountability Report to take stock of progress made in delivering upon policy commitments made in the Seoul (and Toronto) Action Plan,
- A MAP Report, consisting of an updated assessment of G-20 macroeconomic frameworks to develop a forward-looking analysis of whether policies pursued by individual members are collectively consistent with the growth objectives, and
- A Sustainability Report to undertake an in-depth assessment of the nature of large imbalances, rootcauses, and impediments to adjustment that may undermine growth.
4) Conclusion:
G20 till the next Summit
An important number of this year’s participant countries of G20 will attend the Summit with different leaders next year. After Cannes Summit, on the part of EU, in Greece, Italy and Spain, governments changed. In May 2012 Presidency elections will eventuate as for France. Even no de facto change is expected, it is anticipated that Putin will takeover Presidency from Medvedev. Obama will attend G20 in an environment in which countdown for November 2012 elections will be already started.
German Chancellor Merkel who has a key role in the solution of euro crisis will be an exception, forasmuch as elections in Germany will eventuate in 2013.
That’s a subject of curiosity whether Germany will change its tough attitude or not till the next Summit.
Germany rejected the options that implicate Central Bank of Europe as “the lender of last resort”, issuing Eurobonds or instead, creating a fund by pooling SDRs of euro zone countries at IMF. Concerns beneath this rejection were respectively: inflation threat, the fact that reliable countries such as Germany would have to be exposed to high interest rates, the possibility that the independence of German Bundesbank would be damaged and that could cost Bundesbank gold reserves.
However, the fact that German treasury bonds failed to find expected demand in the auction held in late November, caused the question if the risk is looming over the country that seems the most powerful of euro zone.
Germany’s proposal at this stage is an EU Treaty change to establish legally enforceable fiscal monitoring of the EU countries to be rescued.
Time will show whether 2012 Summit in Mexico will start in an environment in which euro zone will be straightened up, or Italy and France also draw to a crisis due to the insolubility.
In 2013, 2014 and 2015 summits will be held respectively in Russia, Australia and Turkey.
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(1) SDR (Special Drawing Rights) are foreign exchange reserve assets defined and maintained by International Monetary Fund (IMF). The SDR’s value is defined by a weighted currency basket of four key international currencies: euro, dolar, Japanese yen and pound sterling. A country in need of external reserves may wish to sell SDRs to another country in order to adjust the composition of its reserves. The option in which IMF creates SDR to provide liquidity to EFSF would lead an inflationist effect and disaccord with the independency of central banks, so that Germany objected to this prospect.
"TÜSİAD Article Series"comprised of articles on current debates. The articles are prepared by TÜSİAD researchers. Opinions expressed belong solely to the author and do not represent the views of TÜSİAD."