G7 ministers face full in-tray

May 27, 2015

German Chancellor Merkel talks to Finance Minister Schaeuble during a debate of the Bundestag in Berlin

G7 finance ministers and central bankers gather in Dresden later today for a two-day meeting at an interesting juncture for the world economy.

A sell-off in government bonds globally eased up last week but has unsettled investors and policymakers. It may have something to do with the fact that oil has now recouped more than a third of its dramatic fall in the second half of last year, banishing thoughts of deflation.

One of the themes of the year so far has been the euro zone beginning to pick up while the United States and China have faltered. But there are reasons to think that might not continue.

European Central Bank money printing will continue but the backing up of government borrowing costs, a significant bounce by the euro and the climbing oil price could all curb the recovery in Europe and elsewhere.

German Finance Minister Wolfgang Schaeuble told Reuters the G7 policymakers might discuss the increase in the yuan’s importance and the Chinese currency’s possible inclusion in the International Monetary Fund’s currency basket. They would also seek to solidify the world’s recovery, addressing the limits of monetary policy and how to prevent new bubbles from forming.

The yuan issue is particularly interesting. After establishing wide support for a China-led Asian investment bank in the teeth of U.S. opposition, Beijing appears to be getting closer to joining the major league of reserve currencies with a deal possible later this year to include the yuan in the International Monetary Fund’s unit of account.

Officials say European members of the G7 – Germany, Britain, France and Italy – favour adding the yuan this year to the basket that comprises the dollar, euro, yen and sterling. Washington, where China’s growing economic and political muscle is a source of concern, is reluctant to add the yuan so soon to the currencies that make up the IMF’s Special Drawing Rights.

Greece is also likely to be discussed at the G7 meeting although it is not officially on the agenda.

Prior to flying to Dresden, U.S. Treasury Secretary Jack Lew speaks at the London School of Economics. Will Washington, as the IMF’s largest shareholder, start pressing its European G7 colleagues hard to reach a cash-for-reforms deal with Greece, without which officials in Athens are saying they may not be able to make repayments to the Fund which are due next month?

Running short of cash to pay public sector salaries, pensions and debt obligations, senior members of Prime Minister Alexis Tsipras’s government have said Greece does not have the money to pay 300 million euros to the IMF on June 5. It faces a series of IMF repayments totalling 1.6 billion euros next month.

The government said on Monday it would try to make the payment and Finance Minister Yanis Varoufakis expressed confidence that a cash-for-reforms deal with lenders would be struck in time to avoid default.

Euro zone officials said Athens could win more time to negotiate a funding deal without defaulting if it lumps together all the IMF repayments and pays them at the end of June.

With a parliamentary majority, albeit a slim one, in his back pocket Britain’s David Cameron will unveil his legislative plans at today’s state of opening of parliament with Queen Elizabeth delivering the message in time-honoured fashion.

It will be interesting to see if any light is shed on where the swingeing public spending cuts that have been pledged will fall, how promised tax cuts will be funded, and how plans for an EU referendum and a renegotiation of Britain’s relationship with the bloc are framed. Other thorny issues include the intention of getting Britain out of the European Human Rights Act and cutting immigration.

Germany and France have agreed plans to strengthen cooperation among euro zone countries without changing existing EU treaties, in a potential setback for Cameron who says his plans for EU reform require treaty change.

He will hold meetings this week with both countries’ leaders. The blueprint would bolster the 19-nation euro zone by holding more regular summits of its leaders, strengthening the Eurogroup forum of finance ministers and establishing euro zone-specific structures within the European Parliament.

Danish media are reporting that Prime Minister Helle Thorning-Schmidt will call an election today. Election fever has been running high in recent days, with the government promising a spending package of $5.7 billion and raising its economy forecasts. Thorning-Schmidt lags in the opinion polls but may think she has a better chance now than in September, the deadline for a next vote.

Finland’s proposed three-party centre-right government, led by millionaire businessman Juha Sipila, is expected to form a coalition and announce its full governing programme with austerity to feature prominently. Populist anti-EU party leader Timo Soini is expected to take the role of either the finance minister, foreign minister or economy minister.

The European Commission will publish its proposals on relocation of migrants – some 40,000 who have crossed the Mediterranean and are in Italy and Greece, and who will now be moved elsewhere in bloc. United Nations chief Ban Ki-Moon is visiting Brussels as the EU seeks U.N. Security Council approval to seize boats of people smugglers.

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