Finance officials from the Group of 20 (G20) industrialised and emerging market economies have agreed to maintain economic stimulus measures until recovery from the global crisis is assured and asked the International Monetary Fund to assess whether countries were on track for delivering strong, sustainable, and balanced growth to avoid future problems.
"Economic and financial conditions have improved following our coordinated response to the crisis," the G20 officials said in a statement. "However, the recovery is uneven and remains dependent on policy support, and high unemployment is a major concern. To restore the global economic and financial system to health, we agree to maintain support for the recovery until it is assured."
The finance ministers and central bankers, gathered in the Scottish town of St. Andrews November 6-7, committed to a timetable for a new system of keeping an eye on each others' economies, under which countries would present national and regional plans by the end of January to support sustainable recovery and job creation.
At their last meeting in Pittsburgh in September, G20 leaders agreed a framework for peer review, assisted by the IMF, that is designed to ensure that national economic policies are consistent with promoting balance in the global economy.
The officials want to avoid derailing the recovery by withdrawing the stimulus too soon or by leaving it so long that the resulting debt encourages investors to push up market interest rates. The IMF says the debt ratio of the advanced G20 nations could be 40 percentage points above the pre-crisis level by 2014, threatening to drive up borrowing costs as much as 2 percentage points. In a note to the G20 leaders, the IMF outlines a series of seven principles to consider for unwinding the stimulus when appropriate.
The fragility of the rebound was highlighted by a report on November 6 showing the U.S. unemployment rate climbed to a 26-year high of 10.2% in October.
Financial Sector Tax
The G20 officials—representing around 90% of the world's wealth, 80% of world trade, and two-thirds of the world's population—emphasized the need for quick implementation of banking industry reform, saying that stronger standards should be developed by the end of 2010, with the aim of implementation by the end of 2012 as financial conditions improve.
At the meeting, British Prime Minister Gordon Brown says it was time to consider a global financial levy, such as a tax on transactions or an insurance fee, to build up a "resolution fund" as a buffer against future bailouts. Banks needed "a better economic and social contract" that reflected their responsibilities to society. Any measures must be implemented by all major financial centres, Brown notes.
Following the Pittsburgh summit, the IMF has been working on suggestions for such a levy and plans to have some initial ideas by its Spring Meetings in April, to be held in Washington.
IMF Managing Director Dominique Strauss-Kahn told reporters the IMF was considering several options for the G20 to look at. "We can't go on with a system where some individuals take risks that finally all taxpayers, like you and me, have to pay for. The financial industry has made such big innovations that it is probably impossible to find a transaction tax that will not be avoidable by potential taxpayers. So it will be based not on transactions but on something else."
He made it clear that there was no consideration of a currency transactions tax.
He says there were two possibilities for a financial sector tax, including a "possible windfall tax for 2009, a one shot thing." The other would be a more long-term tax. Some trade off between regulation and taxation could be made: the more regulated a country, the less taxation would be needed. For example, European countries may need to tax the financial sector less because their banks were more regulated, while the less-regulated United States may want to impose a higher levy.
He said he was personally in favor of such a levy, that he referred to as “an IMF tax,” but countries could follow their own approach. “We don’t want an extra-simplistic solution that will not be effective. I am very pragmatic: I would prefer a second best solution we can all implement."
"Think of it as a two-fold objective: incentive for markets to take less risk; and to provide resources to an insurance fund if risk materialises."
IMF First Deputy Managing Director John Lipsky is leading the group within the IMF to prepare a report for the G20 on the issue. “It is widely accepted that deposit insurance should be funded by a tax on the banking system,” said Lipsky last month. “This can be viewed as a mandatory insurance plan. In the wake of the current crisis, it is appropriate to consider the same issues more broadly across the financial system.” The IMF’s report would cover how potential mitigation costs could be borne and whether it was right to think about specifically charging the financial sector.
Preventing the Next Crisis
Strauss-Kahn reveals the IMF has been engaged with the G20 in its deliberations on how the mutual assessment can be conducted and how the Fund could support and assist the G20 efforts. “We will ask countries to provide the overview of their policies for the next 2-3 years, and will check whether they add up—if they don't we will provide scenarios and advice."
G20 leaders expect members to have completed their mutual assessment by April, with the aim of providing options to discuss when they meet in June. By November, they intend to refine those policy options "and develop more specific policy recommendations."
"This will be the main job of the G20 after this crisis: to prevent the next crisis,” stresses Strauss-Kahn. “We need to see how policies are consistent together or not."
Asked by reporters what will happen if policies are not consistent, Strauss-Kahn says he did not expect to find that all G20 countries’ policies were consistent with each other at present. “We need to provide advice to bridge the gap. It’s in the interest of all countries to avoid crises. If that's true, they will work on this framework."
G20 leaders also committed to take action to tackle the threat of climate change and work towards "an ambitious outcome" at a major UN conference in Copenhagen next month.
Officials are considering a finance package to help poorer nations develop green industries and adapt to climate change.
The G20 comprises Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United States, and the rotating EU presidency.