Heads of state from the Group of Twenty (G20) advanced economies meet in Toronto on June 26 and 27 to discuss policies to balance global growth and strengthen global financial supervision. The meeting follows an early-June gathering of G20 finance ministers in Busan, South Korea, which stressed the need for fiscal tightening and "sustainable public finances." G20 leaders are expected to continue debating the severity of belt-tightening measures in Toronto. They will also discuss a global bank tax to forestall future financial crises and pay for bailouts. It remains to be seen whether the group addresses China’s currency policy in light of China’s decision to let the yuan appreciate against the dollar. The following is a summary of the major policy issues for each of the G20 members.
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International monetary system reform tops Argentina’s G20 agenda, since the country is heavily dependent on exports. Argentine authorities support reforms that will tame international capital flows and boost demand (PDF) for the country’s exports, writes Esteban Kiper, an economist at the University of Buenos Aires. More flexible IMF lending practices are also a priority, since Argentina believes its economy suffered from harsh austerity measures imposed by the IMF following its 2006 debt crisis. The debt crises of Greece, Spain, and Portugal have given new urgency to these demands, says Dr. Miguel Kiguel, an economic consultant for Latin American governments.
Australia’s treasurer Wayne Swan says his country wants to work with the G20 on financial regulation and reforming international financial institutions. But he opposed a global bank tax (Australian) at the early June meeting of finance ministers, arguing that Australian banks do not need increased regulation, since they took less risk before the financial crisis than troubled banks in the United States and Europe. Australia hopes to "portray itself as a shining example of an already well-regulated financial system and a prudent fiscal manager," says Roubini Global Economics analyst Mikka Pineda. The country will also "tout its new mining tax as a clever tactic to both close the budget deficit and prolong the economy’s gains from the mining boom," Pineda says.
Brazil will argue against (GlobeandMail) proposals for a global bank tax and trade protectionism. The country will also use its relative economic strength to assert its leadership potential, says Council of the Americas Vice President Eric Farnsworth. Brazil’s central bank president, Henrique Meirelles, says Brazil wants emerging economies to wield more power (WSJ) in governing international finance institutions. The summit "will test the ability and willingness of the newcomers to actually help share the burden of global governance," says CFR Visiting Fellow Matias Spektor. But whether "the Brazils of this world put their pockets where their mouth is" remains to be seen, he says.
Britain’s new coalition government signals a dramatic shift in the country’s G20 agenda. Unlike Britain’s former Labour government--which supported U.S. calls to continue global fiscal stimulus--Prime Minister David Cameron prefers drastic spending cuts (DowJones) and tax hikes to avoid a debt crisis like Greece’s. Britain included Europe’s plan for a global levy on banks (WSJ) in its new emergency budget, with Germany and France pledging to follow suit soon, but it will face opposition (SydneyMorningHerald) from Canada, Australia, and developing countries. Cameron is also more skeptical than the previous government of Prime Minister Gordon Brown about Britain’s future involvement in the struggling European Union. He prefers strengthening ties with South Korea (AFP), Saudi Arabia, Turkey, India, and China.
Canada’s G20 agenda (PDF) will focus on promoting stimulus spending, strengthening financial regulatory reforms, resisting protectionism, and promoting trade and investment. In March, Canadian Prime Minister Stephen Harper called for countries to continue stimulus programs (DowJones) to boost the economic recovery. Canada has resisted proposals for a global bank levy, since its stable banking system emerged from the financial crisis relatively unscathed (AFP). Harper said the bank tax would trigger a "lively debate" (GlobeandMail) in Toronto, since he and Britain’s Cameron failed to overcome their differences on the proposal at a London meeting. Canadian Finance Minister Jim Flaherty said the bank tax would "increase moral hazard, rather than preventing excessive leverage." It could also distract Canada from its other G20 priorities (Roubini Global Economics). Flaherty has proposed an alternative "embedded contingent-capital" (GlobeandMail) plan to promote market discipline, and he visited India, China, and South Korea in May and June to garner support for this proposal.
China hopes its June 21 decision to end the yuan’s U.S. dollar peg will placate critics of its currency policy. Chinese Foreign Ministry spokesman Qin Gang warned countries (VOA) to stop accusing China of currency manipulation ahead of the G20 and requested a more cooperative spirit. But the significance of China’s currency gesture remains to be seen. CFR Adjunct Senior Fellow Steven Dunaway says the pace of exchange rate appreciation will depend on economic conditions in China and the rest of the world. European governments are hoping (WSJ) China’s currency shift will make China less reliant on exports and that it will increase domestic consumption, alleviating U.S. demands on Europe to stimulate domestic demand. Tensions will also persist after the Toronto meeting, says Dunaway, since the United States and Europe want a "faster pace of appreciation in the yuan than China is likely to deliver." In the Financial Times, UBS’ George Magnus writes that excessive focus on China’s exchange rate deflects attention from other pressing issues in China, including the country’s excess savings rate, paltry social services, and weak financial sector.
The European debt crisis and lingering recession have pushed economic and financial reforms to the top of the EU agenda. EU leaders have agreed to push for a financial transactions tax on bank trading, despite IMF and U.S. opposition (Euractiv). Tensions between the United States and EU have risen (Bloomberg) in the run-up to Toronto, with President Barack Obama stressing the need for medium-term fiscal stimulus and European leaders like German Chancellor Angela Merkel and European Central Bank President Jean-Claude Trichet urging spending cuts (FT). The financial transactions tax has also drawn mixed reviews from some EU members. Britain, for example, remains defensive (Reuters) about increased EU regulations that threaten Britain’s national sovereignty. EU President Herman Van Rompuy has stressed (InternationalBusinessTimes) that Europe is willing to implement the bank levy and transactions tax even if international cooperation falls through. France and Germany are also pushing the EU to crack down on tax havens and increase competition among credit rating agencies.
French President Nicolas Sarkozy and German Chancellor Angela Merkel met to iron out differences (AFP) on how Europe should address its debt crisis. Sarkozy agreed to support Merkel’s proposals for tougher sanctions on EU budget deficits and a ban on naked short-selling, and lost his bid to establish a eurozone central bank. In a letter to G20 host (Reuters) Stephen Harper, the two countries pressed for international agreement on a global bank levy and a financial transaction tax. "We know [a transaction tax is] unlikely to fly at the G20, but France has always been keen to find innovative ways to fund development or climate change," (DowJones) said one French official. The letter to Harper also calls for more regulation of over-the-counter derivatives and credit default swaps. Despite the call by G20 finance ministers for more austerity in heavily indebted countries (Guardian), the "only big European economy yet to spell out an austerity plan is France--a country badly in need of one," notes the Economist.
Merkel, with the backing of Sarkozy, renewed her support for a global bank tax and a financial transaction tax that is opposed by the United States and much of Europe. "We will prepare for the G20 and G8 meetings so that we can go with as united a European position as possible that also covers a bank levy and taxation of financial markets," Merkel said following the European Summit (Euractiv) held a week before the G20. German officials opposed President Barack Obama’s call to boost global growth with continued spending, and instead called on the United States to join Europe in cutting back. The country’s budget cuts aim to save an estimated $80 billion euros over the next four years.
India will oppose a global bank levy and is concerned about the timing of global fiscal and monetary exit strategies. "While we should not rush to fiscal exit (BusinessStandard),"said Finance Minister Pranab Mukherjee, "those countries that have market compulsions may need to start the consolidation now." India also wants to "shore up a supportive atmosphere for trade," given its dependency on exports, writes Rajeev Deshpande for the Economic Times. Indian Prime Minister Manmohan Singh will also emphasize India’s commitment to increasing IMF resources, so the country can play a bigger role in global policymaking, says Arpitha Bykere, an analyst at Roubini Global Economics.
Indonesia wants to keep investment flowing into its economy, reduce currency volatility, and protect the Indonesian economy from external financial shocks (Bloomberg). Indonesia’s new finance minister, Agus Martowardojo, is concerned about tightening credit and illiquidity, though he still predicts the economy will grow 6.1 to 6.4 percent in 2011 (Bloomberg). Martowardojo has proposed loosening requirements (JakartaPost) on IMF loans for emerging countries. He also said France and Germany’s proposed global bank tax "is going too far" (Reuters) and would be ineffective, considering that earlier G20 proposals to limit bank pay never materialized (FT). Indonesian policymakers are expected to support German Chancellor Merkel’s proposed financial transaction tax (Xinhua).
Italy will call for more fiscal restraint, since its budgetary reforms already include public sector pay freezes and salary cuts (Guardian) for the top 10 percent of earners. Italian Foreign Minister Franco Frattini threatened recently to withdraw support (EUObserver) from the EU’s G20 communiqué unless new EU fiscal rules accommodate for public and private aggregate debt. (This would benefit Italy since its private debts are lower than other eurozone countries.) Italy also opposes IMF reforms that could decrease Italian voting rights (PDF) within the institution. At a recent IMF meeting, Italian Finance Minister Giulio Tremonti supported stronger European integration to save the euro, but stressed that export-heavy European economies such as Germany also need reform (FT). Italy opposes the French- and German-backed bank levy, which Prime Minister Silvio Berlusconi has refused to discuss in Toronto (Repubblica). Bank of Italy Governor Mario Draghi (who chairs the G20’s Financial Stability Board) wants more transparency among European banks to restore investor confidence (Repubblica).
Japan’s export industry has suffered from the eurozone debt crisis, as the yen climbed 2.9 percent in May against the U.S. dollar. Japan’s new prime minister, Naoto Kan, is hoping his efforts to spur job creation (Bloomberg) will ease the country’s "mild deflationary phase" and has called for painful tax increases (NYT) to fix Japan’s rising debt. The government plans to announce its fiscal reforms (Reuters) in Toronto, which are expected to include corporate tax cuts and sales tax increases; Kan aims to increase growth to 2 percent by 2020. Japan also wants international consensus on financial regulation, but it opposes a global bank tax and argues that country-specific financial regulations will suffice (Reuters). Japanese officials are concerned about the impact of Germany’s unilateral ban on naked short-selling, which shook Japanese markets.
Mexico’s strong foreign investment flows and limited dealings with the euro have sheltered it (Reuters) from Europe’s sovereign debt crisis. Still, Mexico’s finance minister Ernesto Cordero Arroyo says Mexico needs to shift away from short-term stimulus toward stabilization (PDF). CFR Fellow Shannon O’Neil says Mexico plans to push for international financial institution reform, including easier access to IMF credit lines (Cronica) for countries in financial distress. Mexico will tout the benefits of its access to the IMF’s Flexible Credit Line, which has shielded its economy from global market volatility. Mexico will also join Canada, Australia, and Brazil in opposing the global bank levy. The G20 must also address climate change (NationalPost), President Felipe Calderon has said, rather than waiting for the United States to move first.
Russia is "unlikely to have a particularly ambitious agenda," says CFR Adjunct Fellow Jeffrey Mankoff, since it "is a relatively minor player in global finance." Still, Russian officials are concerned about the country’s slow growth and its difficulties in attracting new investments. Russian President Dmitry Medvedev will continue his push to change how international financial institutions are governed, says Mankoff. Russia will echo other BRIC countries (Brazil, Russia, India, and China) in pushing for more power (Reuters) in international financial institutions like the IMF and more coordination with IMF, World Bank, and G20 policies. Russia will join Canada and Australia in opposing France and Germany’s global bank tax proposal (GlobeandMail). Russia’s ongoing joint ventures with oil giant BP are driving its calls for a fund to insure against large-scale environmental disasters and a new international legal framework to respond to those disasters (Reuters).
Saudi Arabia, the only OPEC representative at the G20, "will continue to keep a low profile," as they did last year, says University of Vermont political science and international affairs expert F. Gregory Gause. "Anything agreed to by the core G7 and the BRICs would not be opposed by the Saudis," he says. But the Saudis might weigh in on energy issues and financial stability, which have major implications for the Saudi economy, says Ibrahim A. Warde, an international business professor at Tufts University. Saudi Arabia is also concerned about the impact of global financial instability on sovereign wealth funds and fellow Arab countries like debt-riddled Kuwait, and the United Arab Emirates. Saudi Arabia wants stronger banking regulations (Reuters) and more conservative lending policies, but opposes creating a global financial regulator.
South Africa will focus on increasing capital flow to the region through aid, investment, and trade. The country is also concerned about the fragility of the global economic recovery (AfricanDevelopmentBank), given its impact on South Africa’s mining and manufacturing sectors (BusinessDay). South African Finance Minister Pravin Gordhan has supported Canada, Australia, and India’s calls for country-specific financial reforms. Gordhan agrees with the United States that fiscal austerity measures should be "growth friendly" (Bloomberg). The country strengthened ties with India and Brazil, which share South Africa’s position as a "leader of, not the developing world, but the next tier up," according to CFR Senior Fellow John Campbell. These ties, along with the country’s hosting of the 2010 soccer World Cup, should boost South Africa’s bid for "greater influence and recognition on the international stage," he says.
South Korea is interested in stabilizing and nurturing developing economies’ growth in the wake of the financial crisis, and wants a global financial safety net (Dong-a Ilbo) to protect these economies from volatile capital markets. South Korea will push for developing countries to follow its example in reducing income inequality, fighting corruption, and increasing government and business transparency, says Kongdan Oh, an East Asian specialist at Brookings Institution. Also on the agenda are energy and industrial reforms to preserve the environment and efforts to promote Korea’s higher-quality exports, says Oh.
Turkey will emphasize its rising global profile. The country is reluctant to ask wealthier G20 countries for economic support despite its high unemployment rate (Bloomberg) of 13.7 percent, fearing its "credentials as both [a] good economic steward and good nationalist" would suffer, says CFR Senior Fellow Steven Cook. The country will focus on boosting trade ties with developing countries like Africa, and avoid lobbying "for economic handouts," says Cook. It is also pleased about its "new stature among the world’s most important economic powers," he adds. Turkey hopes its G20 stature will be further increased by its recent involvement in Israel’s Gaza blockade (Stratfor) and diplomacy with Iran over its nuclear program.
The United States has two main goals: first, to extract some commitment from China on its currency appreciation, and second, to combat German pressure for steep government budget cuts, says CFR Senior Fellow Benn Steil. In a letter to G20 leaders, President Barack Obama urged countries to maintain domestic stimulus spending, arguing for flexibility "in adjusting the pace of consolidation." Obama vowed to reduce the U.S. deficit--which constitutes roughly 10 percent of 2010 GDP--by half over three years, and to 3 percent of GDP by 2015. But his delay in making major deficit cuts indicates a reluctance to make politically unpopular moves until after midterm elections (AFP). Still, the United States is pushing for sweeping domestic financial reform (Reuters), including the so-called "Volcker Rule" (PDF) to ban banks’ proprietary trading. EU reluctance to follow those measures has raised concerns about uncoordinated financial reforms, which could distort international capital flows and render the G20 ineffectual. CFR Senior Fellow Stewart Patrick writes: "The G20 has shown great resolve as a global crisis committee. But this ’fellowship of the lifeboat’ is proving hard to sustain as the crisis ebbs."
--Additional reporting by Jennifer Ching, Toni Johnson, William Saborio, and Michal Toiba