Group of 20 nations are pursuing a two-step approach to avoiding a repeat of the economic imbalances blamed for helping trigger the recent credit crisis and global recession, according to a European Union document.
Prepared ahead of this week’s meeting of G-20 finance chiefs in Paris, the report said the EU “strongly supports” the suggestion made by G-20 officials at a meeting last month to identify when an imbalance is building using a set of economic indicators. The next step is to analyze the causes and perhaps make policy recommendations on how to deal with them.
“The two-step approach will add structure and focus to the work of the G-20,” the report said.
Policy makers are trying to avoid a repeat of the last expansion when U.S. consumers relied on borrowing from abroad to finance their purchases, contributing to an export boom from Asia. As China and other Asian nations accumulated dollars from trade surpluses, they bought U.S. Treasury debt and depressed global yields. Lower borrowing costs helped stoke the U.S. housing and credit booms that later turned to bust.
The EU backs the G-20 plan to this week agree on a general approach and the method for the guidelines, while waiting to make a fuller assessment when G-20 officials next meet in April in Washington, the report said. A draft action plan will be ready for when finance ministers meet again in October, it said.
The aim of the indicators chosen should be to promote sustainable current account imbalances, the report said. The EU will propose monitoring of those gaps as well as government budget deficits and debt burdens, private debts, savings ratios, net foreign asset positions, reserve adequacies and real effective exchange rates. If an indicator starts “flashing” that an imbalance is emerging then that should be a trigger of more analysis, it said.
The EU also backed France’s idea for “accountability” reports to monitor the commitments of G-20 members to promote growth and the first such study should be delivered by April, the report said. The International Monetary Fund and Organization for Economic Cooperation and Development should be asked to identify policy steps to healthier expansion, it said.
The EU also is concerned by the increasing use of temporary capital controls and wants the IMF to identify the drivers of capital flows and appropriate responses.
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