G20 treads familiar ground

February 10, 2015

OECD Secretary General Gurria casts his shadow on the podium as he speaks during a news conference in the G20 finance ministers and central bank governors meeting in Istanbul

G20 finance ministers and central bankers meeting in Istanbul will pledge to act decisively on monetary and fiscal policy if needed to combat the risk of  stagnation, according to a draft communique obtained by Reuters last night. As has been customary at these summits, a lot of the discussion implicitly centres on Germany.

The draft welcomed the European Central Bank’s plan to create more than 1 trillion euros to buy government bonds despite German concern about the policy and flagged growing monetary divergence and the likelihood that the U.S. Federal Reserve will raise interest rates this year, saying some advanced economies with stronger growth prospects were moving closer to “policy normalisation”.

The world’s 20 biggest nations will try and minimize the financial market volatility that will result.

It said the sharp decline in oil prices would provide some boost to global growth and that G20 members will keep fiscal policy flexible while also pledging to put debt as a share of output on a sustainable path. That’s having it both ways in order to get all countries onside.

On Monday, a plan by G20 chair Turkey to get G20 countries to sign up to binding investment targets ran into the sand and in total there is not much meat in this statement.

The draft made only made passing reference to the need for flexible exchange rates, despite the dollar being driven higher by monetary policy divergence, pledging to “stick to our previous exchange rate commitments”.

In the sidelines of the meeting in Istanbul, there was a high degree of alarm about Greece with top U.S. and Canadian officials among those urging a compromise.

A vote of confidence is due tonight in the new Greek government which Prime Minister Alexis Tsipras should win comfortably with the support of lawmakers from his left-wing Syriza party and right-wing junior coalition partner the Independent Greeks.

If it’s possible, Athens and the euro zone look even further apart than last week, with the government declaring restructuring Greece’s debt and lowering its targeted primary budget surplus will be among non-negotiable “red lines”.

Wednesday’s meeting of euro zone finance ministers, at which Greece’s outspoken Yanis Varoufakis will make his debut, could be torrid.

The latest meeting of euro zone officials tasked with doing the groundwork for Eurogroup meetings pitted 18 countries against 1, according to one participant. The likes of Spain and Portugal are at least as vehemently opposed to cutting Greece a whole new deal as the northern Europeans led by Germany are.

One presumes that the new Greek government’s plan is to go in hard, hoping to win concessions. The trouble is that if that doesn’t work it faces a choice of a humiliating climbdown which could wreck its standing at home or exit from the euro.

Matthieu Pigasse, head of investment bank Lazard in Paris which is advising the Greek government on its debt restructuring, said the troika imposing austerity on Greece was totally mistaken and had driven the country’s economy into a wall.

U.S. President Barak Obama is so far resisting pressure from hawks in Washington to rapidly arm Ukraine in its conflict against Russian-backed rebels, though he said Moscow had violated a September peace deal by sending more tanks and artillery into eastern Ukraine.

After talks with Angela Merkel, who opposes sending weaponry to Kiev, he said the pair had agreed sanctions must stay and Moscow’s isolation would worsen if it continued on its current course.

Merkel is due to meet Russian President Vladimir Putin and Ukrainian President Petro Poroshenko on Wednesday with French President Francois Hollande. European Union ministers held off tightening sanctions on Monday to give the talks a chance.

The British Chambers of Commerce annual conference will feature Prime Minister David Cameron, Liberal Democrat leader Nick Clegg but not Labour’s Ed Miliband. The BCC said most of its members wanted to stay in the European Union but wanted an early referendum to end uncertainty.

With wages only just rising in real terms for the first time in this parliament, and that largely due to a plunge in inflation, Cameron will urge businesses must respond to Britain’s strong economic growth by boosting pay.

 

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