On the eve of the G-20 meeting, there remain significant differences of opinion over the timing and scope of exit strategies from monetary accommodation, how the different countries think to move towards fiscal consolidation, and if financial regulatory reform will be universal or not.
Financial regulation will be a key part of the G-20 leaders’ agenda. New capital requirements seem more likely.
Nevertheless, don’t get too excited about their good intentions. Remember, the Bank of International Settlements (BIS) located in Basel, Switzerland already penned in 2004 in the Basel II accords an international standard that banking regulators could use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face.
We all know what happened in the meantime.
Also, following the 2009 G-20 London summit, the Financial Stability Board (FSB) was established in April 2009 as successor to the Financial Stability Forum. Unfortunately despite all the talk, suggestions, and advices, banks balance sheets still remain impaired.
Still, most of the G-20 members have announced they will maintain fiscal and monetary accommodation for as long as is required to ensure a stable recovery.
Some countries, like Israel and China, have already begun to remove some of the excess monetary accommodation. This implies we won’t see a globally coordinated “exiting” face from their accommodation situations.
It’s also a fact that some countries will be forced towards fiscal consolidation earlier than others because of the record growth of their national debt that will oblige them to hike taxes which in turn probably will weaken their recovery as a whole.
We will wait and see if the G-20 leaders promise, one more time, to support the Doha round of multilateral trade talks on removing trade barriers.
This month, the United States raised tariffs on Chinese tires, a move that was countered by Chinese investigation of U.S. trade practices.
There is already a new dispute on the paper industry between the United States from the one side and China, plus Indonesia, on the other side.
In disagreement with the Europeans, the United States wants primarily to focus on reducing global imbalances and promote domestic demand in export-focused economies like China.
Global imbalances have narrowed somewhat since the onset of the financial crisis because of the collapse of the U.S. consumer. It’s too early to have a clue on how the American consumer will behave once the country comes out of this crisis and jobs start growing again at over 150,000 per month.
It’s also a fact that in nearly all economies in the world, the crisis and financial shocks might increase countries’ propensity to self-insure through collecting reserves, which could in turn, once again, exacerbate imbalances.
The bottom line is global imbalances won’t go away for a long time, if ever.
Interestingly, the United States and China have already agreed about the principle that the United States needs to save more and China needs to consume more; unfortunately they have very different views on timing and how to do it.
G-20 leaders are expected to avoid, as much as possible, the subject of the value and role of the dollar. Increasing the use of IMF’s Special Drawing Right (SDR) through IMF bonds is already underway.
Keep in mind that for now, all plausible alternatives to the U.S. dollar lack liquidity and convertibility in some cases.
China and Japan in particular continue purchasing U.S. Treasuries for the very simple reason that they don’t want their currency to appreciate. Now, that said, should U.S. fiscal consolidation be delayed too long, they might change their customs.
It’s now clear that all the major economies are undertaking significant steps in promoting renewable energy, in part because of job creation hopes.
Countries still remain seriously divided over the timing, how to perform, and how to pay for emissions cuts and if it will be mandatory or not for everybody or only for the better-performing and richer economies.
While countries agree on emissions-cutting goals, they doubt, with good reason, the trustworthiness, transparency, and real ability of their counterparts to cut emissions. Emerging and developing economies remain reluctant to agree to any form of emissions caps that might cool their growth.
Interestingly, this great recession by itself has cut, for the first time since emissions measuring began, global GHG emissions in 2008.
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