Gyeongju meeting shows G20’s here to stay
Financial crisis highlights need to strengthen central banks’ role, not diminish it
The Group of 20 member nations (G20) has made some tangible progress on key issues, such as global imbalance and the reform of the International Monetary Fund (IMF), at the G20 Finance Ministers and Central Bank Governors Meeting held in Gyeongju from Friday to Saturday. The Korea Times had a joint interview with Bank of Korea (BOK) Governor Kim Choong-soo and Bank of France Governor Christian Noyer to hear inside stories of the important gathering and their insights about where the global economy is heading. The following is the full script of the interview ― ED.
Moderator: You two just finished a very important meeting with high anticipation from the public not just in Korea but also around the world. Are you satisfied with the result, about the communiqué?
Noyer: I am extremely satisfied. I think everybody was very satisfied and we should be all satisfied. I think there is no period in the past where in such a short period of time we have achieved so many fundamental reforms at the same time.
Under Korea’s presidency, we have achieved one of the most impressive regulatory reforms for the financial sector. It’s not finished. There is still work to do. But the core of the Basel III agreement plus a number of things that have been prepared by the FSB is in place so it is agreed in principle.
Second, we have succeeded in agreeing in principle on the two fundamental reforms of IMF. Because there we have achieved the result which is seen as satisfactory by everybody, honest compromise, which has enabled the fund regain full legitimacy, and be representative of share of importance of various economies and therefore represented the world economy.
Third, we have achieved to design to make a lot of progress on the corporative approach to growth to policies which is conducive to a better and more stable growth of the world. I think these three chapters are really amazing and the importance of what we have done.
Kim: I think what is important is that the market should appreciate the decisions we made today. I hope and believe the market will respond positively to what we agreed today. There were some skepticism that in the market and also in other sectors that the leaders or the finance ministers and the central bank governors may not be able to agree on some important issues. But as governor Noyer explained, for most important issues we were able to come up with agreements.
He explicitly mentioned the financial regulations. It was extremely difficult issues but we were able to agree with most of important issues thanks to the hard works of the FSB (Financial Stability Board) and BCBS (Basel Committee on Banking Supervision). Of course they have done the works under the mandate by the G20.
I think it’s a good achievement in that definitely such an agreement reduces the uncertainties prevailed in the market. To that extent, the market will be relieved with the compromises and I think that will affect positively the future development of the economy.
Moderator: Do we have a real chance of achieving the ultimate goal of the peaceful resolution in global imbalances or in what is happening perhaps between the United States and some Western countries on one hand and China and other emerging economies in the other.
Noyer: Absolutely. Suppose that all countries would adjust their policy abruptly on one day to the extreme. Suppose for instance that the United States would take the decision on economic policies so the consumption and investment would drop and saving ratio would increase abruptly from one day to the other so the current account is balanced. On the other hand, that China will take policy decisions and there the current account will also be balanced from one day to another.
It’s clear that the level of growth of the world will drop dramatically if it is done between today and tomorrow. It cannot happen in 24 hours. It has to be done in a way it ensures that it helps the world economy that it does not weigh on the global growth.
Kim: We didn’t discuss the issues between China and the United States. We didn’t discuss those bilateral issues. We always talk on a multilateral basis. Therefore if let’s say rebalancing is the problem, we wanted to find a way for equilibrium among the countries concerned. And a lot of countries are concerned.
It’s not simply a matter between China and the U.S. There is Europe and among Europe there are a lot of countries all facing different situations. So we would like to come up with a kind of balanced view with all the parties concerned.
Role of central banks
Moderator: Another phenomenon from after the crisis is that somehow the people’s impression is that the central banks have lost their power somehow, because they have to cooperate with the finance ministries, and with the government, to fight the problems caused by the crisis. Have central banks lost their power? In other words, central bank independence: how important is it?
Noyer: My answer will be clearly, absolutely no. I think what this treatment of the crisis revealed is that you can be totally independent, be up to your own responsibilities, and I think central banks are really up to the responsibilities that took sometimes very bullish decisions in the fields of monetary policies.
You can be transparent and explain what you are doing. But it’s not mixing up responsibilities. What we have decided was not to please the ministry of finance. It was decided because it was appropriate to reach the goals of the mandate, to fulfill the mandate we have received in terms of price stability. And very often, more and more, the central banks also have to take care of the financial stability, and this is becoming an extremely important thing and financial stability is something that is global. You cannot work out in isolation.
Kim: The new role is all relevant to the central banks because the current crisis was caused by the systemic risk, rather than it was caused by the risk caused by an individual financial institution. A regulatory body usually deals with the risk of an individual financial institution, but it is the role of central banks that deals with the systemic risk. And as the lender of a last resort, it is the responsibility of the central bank to take care of this systemic risk. So it is quite clear that the role of the central bank will be strengthened.
Moderator: The last question should be related to France’s hosting the next G20 meeting. What is your view on new global reserve currency or reform of the international monetary system?
Noyer: In the field of the framework, we make huge steps but we need to make sure that it produces results. And among the new ideas, this review of the international monetary system that our president mentioned six months ago has probably some skepticism. What we intend to do is once again not to concentrate only on the foreign exchange matters, but to how can we have a process that we make sure that there is no negative effect of not-coordinated economic policies that could create pressure on the foreign exchange market.
Second, it is to give protection to avoid or make it unnecessary to build up excess foreign exchange reserves. And this is the field of the financial safety net that the current presidency has very much triggered and has had extremely important results.
The capital flows move from one place to other, and trigger pressures on asset prices, trigger pressures on exchange rates, trigger pressures on inflation sometimes. So we have to make sure the international monetary system works in a smoother way and that the countries that have chosen to follow the principles of a market-driven exchange rate are not penalized or not hit by negative currency spillovers from other policies. So this is something to discuss.
Kim: At the G20 meeting, the issue of a reserve currency didn’t attract much attention. And the issues of reforming international financial institutions make reforming of the quota system of the IMF once in a while the more critical issue.
A global financial safety net is a very important issue not only for the emerging markets but also for the advanced countries because this is the way to reduce or to minimize volatility in the capital market. And by having such a global financial safety net, many emerging markets will know that they can continue to move into the direction of economic liberalization and market opening, which will also help the advanced economies.
Furthermore, once any crisis breaks out, we all know that funding costs are likely to rise, and therefore the advanced countries also will bear a larger burden of funding cost. So by having this global financial net, the whole world market will be more stabilized.
This article was transcribed by business reporter Cho Jin-seo and edited by deputy business editor Kim Jae-kyoung. Business editor Oh Young-jin moderated.