G20 Cannes Summit

November 6, 2011

Leaders from the Group of Twenty released an Action Plan for Growth and Jobs, with explicit country recommendations and somewhat new wording on foreign exchange policy.  That statement opens with a somber assessment of world economic conditions.

The global economy has entered a new and difficult phase. Global growth has weakened, downside risks have heightened, and confidence has waned. Uncertainty over the sustainability of public debt levels in some advanced economies has increased, and the rebalancing in demand from the public to the private sector and from the external to the domestic sector has not materialized.

In Europe, sovereign debt risks in some countries have generated a difficult dynamic of rising interest costs and stresses in the banking system, which are now weighing on confidence and real activity in the euro area. Growth in the euro area is now projected to be weaker and unemployment higher.

In the US, the recovery has been shallower than expected. The desired rebound in private demand has not materialized due to a combination of weak job growth, the ongoing correction in the housing sector and the associated rebuilding of household balance sheets. More certainty and determination over medium-term fiscal consolidation will contribute to the strengthening of growth.

In emerging markets, there are also clear signs of a slowing in growth as developments in advanced economies begin to weigh on these countries. In some emerging market economies, financial stability and overheating risks remain. The lack of exchange rate flexibility in some countries limits policy options to deal with these risks.

Previous remarks about currency policy had borrowed its language from the G7, affiring “enhanced exchange rate flexibility to reflect economic fundamentals and reiterating that excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.”  The new language adds urgency to the call for emerging markets to adopt market-determined forex regimes and mentions Russia and China in an encouraging rather than castigating way:

We affirm our commitment to move more rapidly toward market-determined exchange rate systems and enhance exchange rate flexibility to reflect underlying fundamentals and refrain from competitive devaluation of currencies. The actions above should help address challenges created by developments in global liquidity and capital flow volatility, thus facilitating further progress on exchange rate reforms and reducing excessive accumulation of reserves. We welcome the recent changes to Russia’s foreign exchange regime to allow the rouble to move more in line with market forces and China’s determination to increase exchange rate flexibility consistent with underlying market fundamentals.

The Action Plan devotes little space to monetary policy: “Monetary policies will maintain price stability over the medium term and continue to support economic recovery. As warranted by national circumstances, including medium term consolidation plans, monetary policy will respond to changes in economic and financial market conditions subject to their likely impact on the medium-term outlook for price developments.”

To address short-term economic vulnerabilities among members, the following country recommendations are made.

  • Greece:  An exceptional solution was found to ensure the sustainability of the Greek public debt through a rigorous adjustment program and a voluntary nominal discount on Greek debt held by private investors.
  • Italy:  commits to reaching a rapidly declining debt-to-GDP ratio starting in 2012 and close to a balanced budget by 2013. This objective, based on the full implementation of the 60 billion euro fiscal package approved during the summer, will be underpinned by the strengthening of the fiscal rules, stemming from both the European legislation and the introduction in the constitution of the balanced budget rule. Italy commits to implement, fully and swiftly, the comprehensive plan of growth enhancing structural reforms announced on October 26th.  We welcome Italy’s decision to invite the IMF to carry out a public verification of its policy implementation on a quarterly basis.
  • Euro area:  has adopted a comprehensive package. (i) After having decided to flexibilise the EFSF instruments on the 21 July 2011, the 26 October euro area Summit agreed on a substantial leveraging of its resources up to 1 trillion euro. (ii) agreed to significantly strengthen economic and fiscal surveillance and governance of the euro area. (iii) A particular effort in terms of fiscal consolidation and structural reforms will be made by those euro area Member States that are experiencing tensions in sovereign debt markets. (iv) a comprehensive set of measures to raise confidence in the banking sector has been agreed, including by facilitating access to term-funding where appropriate and temporarily increasing the capital position of large banks to 9% of Core Tier 1 capital after accounting for sovereign exposures by the end of June 2012, while maintaining the credit flow to the real economy and ensuring that these plans will not lead to excessive deleveraging.
  • United States:   commits to the timely implementation of a package of near-term measures to sustain the recovery, through public investments, tax reforms, and targeted jobs measures, consistent with a credible plan for medium-term fiscal consolidation.
  • Japan:  Japan commits to the expeditious implementation of substantial fiscal measures for reconstruction from the earthquake estimated at least 19 trillion yen (about 4% of GDP), while ensuring the commitment to medium-term fiscal consolidation.
  • Australia, Brazil, Canada, China, Germany, Korea and Indonesia:  agree to let automatic fiscal stabilisers work and, should global economic conditions materially worsen, agree to take discretionary measures to support domestic demand as appropriate, while maintaining their medium-term fiscal objectives.
  • Emerging market economies:  commit to adopting macroeconomic policies to enhance the resilience of their economies and those in surplus will adopt macroeconomic policies to move towards more domestic-led growth, thus supporting the global recovery and financial stability.

To strengthen medium-term structural foundations for growth, the following objectives were affirmed.

  • Australia, Canada, France, Germany, Italy, Korea, Spain, the UK, and the US.:  reaffirm their Toronto commitment to clear and credible fiscal consolidation plans to halve deficits by 2013 from 2010 levels, and stabilize or reduce government debt-to-GDP ratios by 2016.
  • United States:  commits to place its debt-to-GDP ratio on a declining path no later than the middle of the decade through a balanced deficit reduction plan that builds on the Budget Control Act of 2011, which enacted about $1 trillion in discretionary savings over the next ten years and locked in at least an additional $1.2 trillion in deficit reduction beyond that. The plan will include: additional spending reductions, among them reforms to entitlement programs; tax reform that raises revenue, lowers rates, and cuts tax loopholes and expenditures; and stronger budgetary rules to enhance predictability and credibility. In combination with the Budget Control Act, these reforms will yield a total deficit reduction of $4 trillion over 10 years.
  • France:  commits to reducing its fiscal deficit to 3% in 2013 through: tighter limits on central government and health insurance expenditure; better targeted social transfers; a growth-friendly reduction of tax expenditures; and the inscription of existing fiscal rules into the Constitution to anchor stability.
  • Britain:  reaffirms its commitment to its planned fiscal consolidation and the detailed four-year departmental expenditure plans set out in the 2010 Spending Review. It will also undertake structural reforms, including measures to ensure growth-friendly fiscal adjustment and measures to address long-term spending pressures and imbalances, such as managing future increases in the state pension age more systematically in response to changes in longevity.
  • Japan:  commits to implementing the “Definite Plan for the Comprehensive Reform of Social Security and Tax” which sets out policies including the gradual increase in the consumption tax to 10% by the middle of this decade and to submitting implementing legislation by the end of FY2011 to realise these policies, in order to meet its Toronto commitment. 
  • India:  commits to strengthening revenue mobilization through tax reforms, including a unified goods and services tax, and overhauling the personal and corporate tax code.
  • Countries with large current account surpluses and those with relatively weak private demand:  will play an important role in rebalancing and sustaining global demand.
  • Germany:  will implement measures to promote private consumption and investment, with the expectation that, expressed as a share of GDP, both components will increase over time. Germany commits to taking measures aimed at strengthening domestic demand, including by alleviating inefficiencies that may underpin low investment and high private savings.
  • China:  will rebalance demand towards domestic consumption by implementing measures to strengthen social safety nets, increase household income and transform the economic growth pattern. These actions will be reinforced by ongoing measures to promote greater exchange rate flexibility to better reflect underlying economic fundamentals, and gradually reduce the pace of accumulation of foreign reserves.
  • Other surplus economies:   recognise that they too have a significant role to play in promoting global rebalancing and commit to encourage private spending (Indonesia, Korea). Indonesia has announced a national plan for infrastructure that will significantly increase private investment.

There were a few times when the G7 also tried to bring more peer pressure to bear by addressing the different responsibilities and circumstances of its members.  Doing so didn’t always succeed.  Moreover, democratically elected political institutions and bureaucratic technocracies to advise and implement policy goals functioned better in the past than such do now among the advanced economies.  Talk can be cheap, and it takes more than written words to impress investors these days.

The next G20 summit will be held in June 12 and hosted by Mexico in Los Cabos, Baja California.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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