BY ASIM ERDILEK
TODAY'S ZAMAN- Last week the G-20, which has declared itself the permanent board of global economic governance, eclipsing the G-7 and the G-8, was back in the news.
The G-20 finance ministers and central bank governors, including Turkey's Ali Babacan and Durmus Yilmaz, held their June 4-5 meeting in Busan, South Korea, to pave the way for the fourth G-20 summit of heads of state and governments in Toronto on June 26-27. But at the end of the week, mostly dismal economic and financial news dominated the G-20 in the headlines. On Friday the euro fell to a new four-year low against the US dollar, falling below $1.20 for the first time since March 2006 as volatile financial markets continued to fret about the contagious euro zone sovereign debt crisis.
In the days leading to the meeting of the G-20 finance ministers and central bank governors, there was much media speculation about the issues expected to dominate their agenda. The most controversial issue that divided the G-20 members seemed to be taxing financial institutions as part of global financial repair and reform. Just like before previous summits, the G-20 ministers were charged to discuss the split and bridge the divide before the Toronto summit. Their task was no easy one.
The day before their Busan meeting, US Treasury Secretary Timothy Geithner sent a three-page letter to his colleagues, making six suggestions as to how they might focus their efforts. His suggestions centered, in the short term, on maintaining and strengthening the global economic recovery, and, in the medium term, on fiscal as well as financial reforms to guard against future crises. He was most emphatic and specific about global financial reform in terms of: (1) a new regulatory framework encompassing overall capital and leverage ratios as well liquidity requirements (referred to as Basel III, based on the work of the Basel Committee on Banking Supervision, under the auspices of the Bank for International Settlements); (2) oversight of over-the-counter (OTC) derivatives markets; (3) stronger transparency and disclosure requirements; and (4), a framework to manage the failure of large global financial institutions without saddling taxpayers again with huge bailout costs.
The three-page communiqué issued after the G-20 ministerial meeting emphasizes, following the recent Organization for Economic Cooperation and Development (OECD) recommendation, the urgent need for fiscal consolidation -- i.e., curbing gaping budget deficits and reducing heavy debt burdens -- in reaction to the turmoil in financial markets that fear a global sovereign debt crisis. 'The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability, differentiated for and tailored to national circumstances,' it said. 'Those countries with serious fiscal challenges need to accelerate the pace of consolidation.' This emphasis on immediate fiscal consolidation can be interpreted as a victory for the EU, especially Germany, and a defeat for the US, which had expressed concern that the fragile economy recovery could fizzle without continued fiscal as well as monetary stimuli. Much of the rest of the communiqué is devoted to the issues and principles of financial repair and reform, reflecting mostly the suggestions in Geithner's letter.
But the communiqué does not endorse any specific proposal for taxing financial institutions such as those made recently by the International Monetary Fund in 'A Fair and Substantial Contribution by the Financial Sector -- Interim Report for the G-20.' As a victory for countries such as Australia, Brazil, Canada, China and Japan, whose banks weathered the global financial crisis with little damage, and a defeat for the EU and the US, it merely states that 'the financial sector should make a fair and substantial contribution towards paying for any burdens associated with government interventions, where they occur, to repair the banking system or fund resolution,' adding that the IMF is to deliver its final report on this issue at the Toronto summit. Besides the fiscal consolidation and financial reform issues, the communiqué addresses other assorted, relatively less urgent and critical issues, diffusing its focus. It supports the efforts of the Global Forum on Tax Transparency and Exchange of Information and the Financial Action Task Force against tax evasion and money laundering. It endorses the ongoing governance reforms of the World Bank and the IMF, as well as other international financial institutions (IFIs), to increase the voice of developing countries, especially emerging market economies. It praises the progress on financial inclusion, referring to 'Principles for Innovative Financial Inclusion and stock-taking best practices in SME finance.' It welcomes the launch of the Global Agriculture and Food Security Program and supports the cancellation of Haiti's debts to IFIs. Finally, it encourages 'phasing out inefficient fossil fuel subsidies that encourage wasteful consumption.'
The G-20 finance ministers and central bank governors, set to meet again in late October in Gyeongju, South Korea, before the November Seoul Summit, seem to have done their best to pave the way to the Toronto summit. But they have evidently failed to resolve several basic disagreements within the G-20 on financial repair and reform that will confront their leaders in three weeks.