G20 drops support for fiscal stimulus

G20 drops support for fiscal stimulus
By Chris Giles and Christian Oliver in Busan
Copyright The Financial Times Limited 2010
Published: June 5 2010 11:54 | Last updated: June 5 2010 11:54
http://www.ft.com/cms/s/0/786776b4-708f-11df-96ab-00144feabdc0.html


Finance ministers from the world’s leading economies ripped up their support for fiscal stimulus on Saturday, recognising that financial market concerns over sovereign debt had forced a much greater focus on deficit reduction.

The meeting of the Group of 20 finance ministers and central bank governors in Busan, South Korea, also dropped proposals for a global banking levy, instead giving countries leeway to do what they thought best for their domestic circumstances.

The communiqué of the meeting made it clear that the G20 no longer thought that expansionary fiscal policy was sustainable or effective in fostering an economic recovery because investors were no longer confident about some countries’ public finances. “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,” the communiqué stated.

“Those countries with serious fiscal challenges need to accelerate the pace of consolidation,” it added. “We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions”.

These words were in marked contrast to the G20’s previous communiqué from late April, which called for fiscal support to “be maintained until the recovery is firmly driven by the private sector and becomes more entrenched”.

After the meeting, finance ministers acknowledged that the landscape had changed. George Osborne, British chancellor, claimed credit for the change. The new words were a “significant success in getting endorsement from the G20 for … a significant change in tone in the language on fiscal sustainability”.

Many other finance ministers accepted market realities had changed the G20’s policy, Christine Lagarde, French finance minister, said: “There’s a large majority for whom redressing the public finances is priority number one. For a minority, it’s supporting growth”.

Even Dominique Strauss Kahn, managing director of the International Monetary Fund who championed fiscal stimulus since January 2008, recognised the world was suddenly different. Asked whether he felt comfortable with the change in tone from the G20, he replied: “Totally comfortable. I am not the champion of fiscal stimulus, but the champion of right fiscal policy”.

But there were concerns around the G20 that the rush to reduce budget deficits, necessary though officials now thought it was, would undermine the recovery in the near term.

In a letter to the rest of the G20, Tim Geithner, US Treasury secretary, argued: “Concerns about growth as Europe makes needed policy adjustments threaten to undercut the momentum of the recovery”.

Ministers from many countries stressed the need for structural reforms to boost the potential for private sector growth

In private, G20 officials said that the US had been the country most concerned about the new austerity drive and feared for the momentum for global growth. In the meetings it had been frank in the meeting in calling for China to revalue the renminbi and for Germany to boost domestic demand, officials said.

Mr Geithner, himself, was open about his fears in his letter to the G20. “Concerns about growth as Europe makes needed policy adjustments threaten to undercut the momentum of the recovery,” he wrote, adding that fiscal tightening won’t “succeed unless we are able to strengthen confidence in the global recovery.”

When discussing reforms to the financial system, the G20 found there was no consensus for a global levy on banks. The decision to allow countries to pursue their own domestic agendas on new taxes on banks was particularly pleasing for Canada, which has long opposed the idea.

Jim Flaherty, Canadian finance minister, said: “The debate on … bank levies has been a distraction form the core issues and it has been apparent again from out meetings that most of the G20 members do not support the concept of a universal levy”.

Instead, the G20 “recognis[ed] there is a range of policy approaches” and that countries could develop their own thinking, “taking into account individual country’s circumstances and options”.

For countries such as the US and UK still wanting to go ahead with unilateral banking levies, the G20 agreed that they should be devised within a set of principles to minimise the opportunities for banks to pick and choose between different jurisdictions depending on the levies introduced.