The G20 needs to embrace growth
This weekâ€™s Group of 20 meeting of finance ministers and central bankers in Mexico City needs to take concrete actions to support global growth and job creation, revive credit growth by the private financial sector, guard against a rise in trade protectionism and reduce financial market uncertainties.
The scope for long-overdue G20 actions on budget deficits and payments imbalances, including currency misalignments, is limited this year given presidential and legislative elections in France, South Korea, the U.S., and Mexico, and given the emergence of a new leadership team in China, a once-in-a-decade event. Politicians may well want to avoid taking unpopular measures right now, even if they’re necessary. However, there is still significant scope now for concrete G20 measures that strengthen the forces for growth and confidence-building in the short term.
Over the last two years, a euro sovereign crisis has been building in which many of the lessons that should have been learned from past debt crises in Latin America and Asia have been ignored. These include the risks of contagion, the dangers of delaying tough decisions, and the excessive focus on imposing austerity on debtor countries. The latter undermines debtor nations’ political leaders and their crucial task of building public support for tough reforms, ultimately creating the opportunity to grow their way out of their difficulties.
We need better balance. It is crucial for the G20 ministersâ€™ meeting to emphasize concrete measures to strengthen competitiveness for countries now facing acute difficulties. For example, officials from the IMF and the euro zone governments should encourage Spain, Italy and Portugal, in particular, to introduce short-term actions that explicitly create jobs and stimulate investment. At the same time these countries should underscore their medium-term commitment to fix their underlying problems by mapping detailed budget and structural reform programs.
For its part, the U.S. Congress has taken action, finalizing an extension to the payroll tax deduction and securing unemployment benefits, that provides essential momentum to the economy. But more needs to be done. The U.S. should signal at the Mexico City meeting that it recognizes the risks of deleveraging right now by financial services firms, which in part is a product of enormous uncertainty about future rules and regulations. At an absolute minimum, there should be a freeze on any new regulation or additional capital requirements beyond what has already been approved by Congress and the regulators; bank capital requirements today are high enough.
Indeed, the G20 should declare its opposition to any new macroeconomic or financial regulatory actions that may dampen 2012 growth. This means, for example, that euro zone leaders should come to their senses and end the dangerous talk of introducing a financial transactions tax. European governments should also avoid imposing any new capital requirements on banks, over and above Basel III standards, at a time when banks’ balance sheets are being hit hard by sovereign debt losses, forcing them to reduce credit extension and therefore prospects for economic growth.
In addition, at a time when global economic conditions are so fragile, it is prudent to bolster the resources available to the International Monetary Fund. The G20 should encourage the IMF to create a special financial vehicle with resources from the countries with large foreign exchange reserves, such as Brazil, China, India, Japan, Saudi Arabia and South Korea. These resources could then be deployed swiftly to provide support to countries around the globe should they confront acute difficulties.
The European Union, U.S., Japan, and China and the other leading emerging market economies should also act on administrative matters that relate to international trade and investment. Clear signals should be given by the G20 governments that they will not block major inward private investments into their economies or take a narrow antitrust view of proposed major cross-border mergers.
These actions will contribute to enhancing the overall environment for growth and investor confidence. Right now this is important and probably the most that we can realistically expect.