G20 summit, crisis measures and what is in it for EU10

By Zdenek Kudrna

The G20 leaders agreed on their London summit to the following commitments:

Restore confidence, growth, and jobs by:

• fiscal expansion in 2009 of up to $5 trillion, plus $1 trillion package added at the summit;
• exceptional easing of monetary policy by central banks;
• recapitalisation, liquidity and impaired assets removal from banks;
• commitment to cooperation in order to return to trend growth;
• promise of credible exit strategies to ensure long-term fiscal sustainability and price stability of the above;
• commitment to refrain from competitive devaluations.

Repair the financial system to restore lending by:

• establishing a new Financial Stability Board (FSB) with a strengthened mandate including all G20 countries, Financial Stability Forum (FSF) members, Spain, and the European Commission;
• ensuring that the FSB collaborates with the IMF to provide early warning of macroeconomic and financial risks and the actions needed to address them;
• reshaping regulatory systems so that the authorities are able to identify and take account of macro-prudential risks;
• extending regulation and oversight to all systemically important financial institutions, instruments and markets, including systemically important hedge funds;
• endorsing and implementing the FSF’s strict new principles on pay and compensation and supporting sustainable compensation schemes;
• taking action, once recovery is assured, to improve the quality, quantity, and international consistency of capital in the banking system so that regulation prevents excessive leverage and require buffers of resources to be built up in good times;
• ending the era of banking secrecy by taking action against non-cooperative jurisdictions (on OECD black list), including tax havens to protect public finances and financial systems;
• calling on the accounting standard setters to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards; and
• extending regulatory oversight and registration to Credit Rating Agencies to ensure they meet the international code of good practice, particularly to prevent unacceptable conflicts of interest.

Strengthen financial regulation to rebuild trust by:

• providing up to $750bn of new funds to IMF which shall provide it via Flexible Credit Line and reformed lending and conditionality framework;
• completing the next review of IMF voting quotas by January 2011 and ensure open, meritocratic selection of leadership for IMF and the World Bank;
• deliberating on a new global consensus desirable on the key values and principles that will promote sustainable economic activity.
• Promote global trade and investment and reject protectionism by:
• refraining from measures that in their consequences reduce trade and investment flows (even though they may be acceptable under the WTO rules);
• supporting trade financing with to $250 bn channeled through export credit agencies and multilateral development banks; and
• remaining committed to Doha Round of WTO negotiations.

Build an inclusive, fair, green, and sustainable recovery by:

• limit the impact of the crisis on poorest countries and people by sticking to pre-existing commitments for development and social financing and using additional $6 bn of IMF surplus and proceeds from gold sales to this end over next 2 to 3 years;
• channel the stimulus funding towards sustainable green projects as much as possible.

What is in it for EU10?

• The EU10 development models are crucially dependent on their connections to global economy via open trade and capital flows. Commitment to preserve the former and provide better institutional underpinnings for the latter must be welcome in EU10 capitals. EU10 economies are bound to benefit from increased demand for their exports that stimuli are likely to deliver, providing that their trading partners do not impose any "buy American" or "build in France" type of restrictions. This may be especially relevant in respect to stimuli focused on European car demand.
• Given that Hungary, Latvia and Romania depend for elementary macroeconomic stability on IMF lending, beefed up IMF is good news. It is likely that more countries will have to reach for a stand-by agreements. If they can do so under more creative and flexible conditions, then reforms of IMF practices are welcome.
• None of the EU10 economies is a member of G20 (although Czech Prime Minister was present in London as he holds the rotating EU presidency now). EU10 have limited role in global affairs and will have to adjust to whatever the new regulatory regime evolves. However, better regulation will definitely reduce the uncertainty stemming from gaping holes in the EU and global banking regulation that keeps host-country supervisors on the sidelines. In case of failures of foreign banks dominating EU10 financial sectors, the host country regulators, central banks and governments can only hope that their home-country counterparts, will succeed in restructuring and limit the spillover-effects on EU10 economies. Improvement of the international regulatory regime that would strengthen involvement of host-country authorities and define credible ex ante rules for burden sharing is better than current vagueness and uncertainty.