Cannes/Brussels, 07/11/2011 (Agence Europe) - On Friday 4 November, the G20 summit agreed on an action plan listing country-by-country recommendations on how to deal with persistent economic problems and boost world economic growth (see EUROPE 10489). In their final press release, the world's economic powers said they had agreed on an action plan for growth and employment to correct various short-term vulnerabilities and boost the foundations of growth in the medium-term.
Three separate groups of countries are covered by the Action Plan: - developed nations are urged to support growth and introduce clear, credible and targeted measures to rebalance their public finances; - countries whose public finances are solid pledge to let automatic stabilisation mechanisms operate (Ed: allowing public deficits to grow in times of slow growth) and take discretionary measures to support domestic demand if there is a sharp deterioration in the economic situation; - countries running large current account surpluses pledge to introduce reforms to boost domestic demand and greater exchange rate flexibility. They all promise to strengthen structural reforms to increase production, and say they favour monetary policies that will ensure price stability in the medium-term to encourage economic recovery.
French President Nicolas Sarkozy said that the Cannes summit differed from previous G20 summits because it reacted differently to countries in different situations. Firstly, countries with a solid budget, like China and Germany, will act as automatic stabilisers and are prepared to take new measures to boost growth. He said this applied to Germany, Australia, Brazil, Canada, China, South Korea and Indonesia. Sarkozy said that countries with hefty surpluses pledge to increase domestic demand and speed up changes to their exchange rate systems to introduce flexibility and reduce currency reserves in the medium-term. He said that China had made this pledge, and he described it as excellent news. He said the novelty at Cannes was the fact that the social aspect of globalisation had been taken into account and G20 countries had called for the introduction of basic social security.
Eurozone. Floundering in the sovereign debt crisis, eurozone nations pledged to pull out the stops to ensure financial stability by boosting the EFSF bailout fund (introducing leverage to increase lending capacity to €1 trillion), strengthening economic and budget surveillance, consolidating public finances, introducing structural reforms, bank recapitalisation and the “exceptional” solution to get the Greek economy back on track.
At the Cannes summit, Italy agreed to quarterly IMF inspections to check that it is implementing all the measures it has announced (in addition to the IMF experts, the European Commission will be sending its own experts to monitor progress in Italy). It has pledged to cut debt as a percentage of GDP from next year onwards and balance the budget in 2013 by introducing a €60 billion package of measures (decided upon at the summit) and adding a “Golden Rule” to the Italian constitution to make it illegal to run public deficits above a certain level.
Financial regulation. Great progress was made in the domain of financial regulation, publishing a list of 29 financial institutions deemed to be too-big-to-fail. The list includes four British banks (Barclays, HSBC, Lloyds and Royal Bank of Scotland), four French banks (BPCE, BNP Paribas, Crédit Agricole and Société Générale), two German banks (Commerzbank and Deutsche Bank), one Belgian bank (Dexia), one Spanish bank (Santander), one Italian bank (Unicredit), one Dutch bank (ING) and one Swedish bank (Nordea). The list will be finalised by 2015 and was drawn up according to the size of the balance sheet, interconnection with other banks, the ability to replace a competitor that goes bankrupt, the international spread of the bank and the complexity of its business deals. The banks in question must increase their capital in 2016 to have a fixed capital ratio of between 8% and 9% and will be subject to tighter transparency rules.
The G20 restated its plans to boost the regulation and supervision of the parallel banking system by, for example, dealing with risks arising from high frequency computerised dealing and lack of transparency about liquidity. The European Commission has added this recommendation to its draft MiFID II legislation updating the EU financial instrument rules (see EUROPE 10478) and will be assessing credit default risk markets. The restructuring of Greece's debt by a “voluntary” agreement by banks has raised questions about whether CDS are worthwhile if the payment of insurance premiums is not automatic. The G20 agreed to reform the IMF's Financial Stability Board (FSB) to make it a separate legal body and give it greater financial autonomy. The governor of the Bank of Canada, Mark Carney, has taken over from Mario Draghi as the FSB head, now that Draghi is president of the ECB.
Reform of the monetary system will take time, admitted the French president. Global leaders looked at the option of introducing new currencies into the basket of special drawing rights (SDR), the IMF's accounting unit, currencies like the Chinese yuan and the Indian rupee, and are planning to update the SDR by 2015. Sarkozy said that the Chinese yuan was an obvious candidate in the light of China's pledge to gradually make it convertible. He added that the G20 now recognises the use of capital controls as a valid stability measure. Brazil, for example, taxes capital flooding into the country as a result of the US economic recovery measures.
Tax havens. Nicolas Sarkozy said that he wanted to get rid of tax havens and the G20 message was very clear - countries that continue to be tax havens and hide the identities of bank account owners will be shunned by the international community. He said further progress was needed and listed eleven countries - Antigua, Barbuda, Barbados, Botswana, Brunei, Panama, the Seychelles, Trinidad and Tobago, Uruguay and Vanuatu, which have not yet introduced legislation to make the exchange of tax information possible. He also mentioned Switzerland and Liechtenstein, which have not yet fully introduced exchange of information rules and therefore cannot demand to be assessed according to the effectiveness of their rules (Phase 2) until they fill certain gaps that have been identified. Sarkozy said that credibility about the G20 pledge to tackle tax havens would be assured though automatic publication at every G20 summit of the list of countries that have not yet rectified their unacceptable behavior. The issue may emerge on Tuesday on the fringes of the ECOFIN Council meeting. (MB/LC/transl.fl)