G-20 Summit's Fiscal and Financial News

It would be easy to dismiss the recent G-20 Summit in Pittsburgh as just more political babble, more empty business as usual just among more countries – but you would be wrong. The Summit’s agenda was pragmatic and ambitious, perhaps one of the most ambitious in awhile. And, contrary to what some pundits cautioned, the array of possible deliverables in the next year is mind-numbing, from fiscal policy to financial sector reform to energy policy. Now that G-20 leaders have given their seals of approval on a wide-ranging agenda and areas of agreement and disagreement have been sorted out in Pittsburgh, a series of international follow up meetings will take place among cabinet ministers, central bankers, and technical experts.

On fiscal policy, there were hopeful developments. In the “Framework for Strong, Sustainable and Balanced Growth” (described as a new “compact”), G-20 leaders have agreed to set out medium term national policy frameworks based on the shared objective of rebalancing global growth. The frameworks are to cover fiscal, monetary, trade and “structural” (not defined) policies. The idea is that each country’s framework will be presented to and assessed by fellow G-20 partners, with guidance from the International Monetary Fund (IMF). We will hear more in November when a follow up meeting takes place with Treasury Secretary Geithner, other Finance Ministers, and the central bankers.

Why do we call this development "hopeful"? As we emerge from the deepest recession since the 1930s, our confidence in the future (often called "credibility" by taxpayers and creditors) would improve if we thought our fiscal house would be put in order and sensible management take place, so that underlying growth would be stronger in the longer run.

We hope that the national frameworks would include commitments to stimulus as necessary, to exit strategies from stimulus, and to fiscal consolidation (including the tackling of structural problems) to boost sustainable growth. National policies can be expected to vary in terms of timing, content and size, depending on the country.

By placing exit strategies and beyond within a global context, G-20 leaders have highlighted the importance of global economic cooperation in terms of national self interest. National stimulus packages were more powerful because of global coordination, and, similarly, there is concern that uncoordinated withdrawal of that stimulus could have a negative effect on economies trying to recover. In addition, it is hoped that global cooperation will provide political cover to help world leaders implement exit strategies from stimulus, which may not be politically easy. U.K. Prime Minister Gordon Brown recently announced at the annual meeting of trade unionists that to reduce the U.K. fiscal deficit, the top personal tax rate would be increased and spending cuts made (in 2011, it appears); and the Spanish government has announced tax hikes for its 2010 budget, which must be approved by parliament. These announcements have already set off opposition.

G-20 leaders also discussed financial regulatory reform at length. Considerable work remains, and meetings of experts to nail down agreements will be held over the next year, starting with the November meeting of central bankers and finance ministers. Among the critical areas discussed in Pittsburgh were requirements for higher capital levels and increased quality of capital for banks; changes in compensation practice to reflect “long-term value creation”; and the tightening of derivatives market trading (although changes for non-standardized trading, which many consider a feature of today’s financial crisis, would be limited).