G20 to plot response to debt hangover
Trade rebalancing, more capital control tools on agenda of this year’s summit
By Cho Jin-seo
In November last year, leaders of Group of 20 (G20) countries gathered in Seoul to seek policy cooperation for reducing global imbalances and ensuring sustainable economic growth, a move that was ultimately aimed at preventing another crisis.
Nearly one year has passed and the situation seems no better as there are growing fears that another crisis will take place again but this time in a different form ― “a sovereign debt crisis.”
With last year’s agreement failing to fix the financial mess in the global economy, the G20 initiative is highly expected to be re-ignited when finance ministers and central bankers meet in Washington on Sept. 23, after months of secret negotiations by national deputies.
“Now the vacation months are over, and the G20 season restarts,” said Bahk Jae-wan, the finance minister, when he met reporters on his 100th day in office earlier this month.
Bahk and his fellow G20 ministers will explore broad options of coordination ahead of the November Summit of national leaders in Cannes, where French President Nicolas Sarkozy will preside. But their top agenda is likely to be the debt crisis in Europe and the United States ― and how to show the world the G20 can be relevant in this matter.
A source at the Korean finance ministry said that it is likely that they will have a formal statement on the debt issue at the Cannes Summit, which will say they will not, and should not implement austerity measures too hastily for the sake of the global economy
“If every government cuts spending, then there will be a problem in the global economic recovery. So it is possible that we will make an agreement on a phased implementation of austerity measures, country by country,” he said.
At deputies’ regular meetings, the atmosphere is said to be quite different from last year’s. In South Korea last year, the G20 ministers argued fiercely over the so-called “currency war” and pointed fingers at one another to blame for the global imbalance and mercantilism. But this year, the G20 members share the same concern over European countries’ fiscal healthiness and they have little to argue about it.
The development of European debt crisis has actually baffled the national deputies at the G20 working group. Before the summer, the most urgent matter for the group was how to follow up with last year’s resolution on global rebalancing ― how to alleviate current account mismatches between exporting nations and importing nations, especially between the United States and China.
The 2010 joint statement labeled the theme as “Framework for Strong, Sustainable, and Balanced Growth,” or simply the Framework. The end result is almost finalized, but the Framework does not draw as much attention as last year since people now care more about budget balances than the trade balances.
“We have done it very well. Actually we did it better than we had expected. But during the summer, we began to ask ourselves: ‘is this really the right time to discuss this issue?’ Everybody is talking about the debt crisis instead these days,” said the source from the finance ministry.
Addressing the European debt issue at the G20 is not easy as well, as there are some people in the group who do not want to bring it up there ― the Europeans themselves. They prefer to keep the issue inside the European Union, the source said, and that sometimes upsets other G20 member countries.
“So we remind them that this is not only an European issue, because there will be contagion to other parts of the world, just like the 2008 crisis was initiated in the U.S. but spread to Asia and others,” the source said.
Meanwhile, the team of deputies, who often meet in Paris or elsewhere for short meetings or via teleconferences, has almost finalized the “Indicative Guidelines” for the global imbalance issue, he said. In the guideline, each G20 country will be given several issues as homework. In case of the U.S., for example, the three root causes of the imbalance are low household savings, national budget imbalance, and the unabated foreign demands on the U.S. dollar.
But these will be dealt only as rough guidelines and there will be no quantitative targets, he said.
Green light on capital controls
Another big change from last year is that even developed countries now see some sort of capital control is needed to control the speculative flow of money. Korea has been leading the world at least in this topic, and recent developments have vindicated Seoul’s adoption of various “macroprudential measures” such as taxes on banks’ foreign currency debts from last year.
As a result, the G20 may agree on a more relaxed approach on domestic financial regulations and tax schemes than is currently advised by the International Monetary Fund, the source said. And there will be no “sequencing” rule, which means that countries will be encouraged to follow a general guideline and be left to decide what measures fit them best, he said.
Challenge for Bahk
The financial ministers and central bank governors will meet in Washington on Sept. 23, on the occasion of the general meeting of the International Monetary Fund and World Bank. Then they will meet again in Paris on Oct. 16. The summit will be held in Cannes on November 3-4.
Korea was the host of last year’s event, and is helping France in administrative affairs this year.
The fall’s meetings will be a challenge to Korea’s Bahk, who is in his fourth month as the finance minister. Formerly the minister of labor, he has little experience or expertise in international finance.