On the other hand, the US has called on Europe to think twice, or rather give up thinking, about exit strategies, worrying that a setback in the recuperation of the global economy would push the crisis into a second dip.
An interesting point here is that, despite its adamant stance on keeping the measures alive, the US’s budget deficit and public debt are not in any better condition than the EU’s.
Nevertheless, this fact has not been discussed much, while everyone is eager to weigh in on the EU’s problems. Why is this? A reasonable explanation would be that the dollar is still the reserve unit in international trade despite being recently overvalued, and the US has sufficient instruments on hand to defer its financial problems, such as increasing the number of banknotes in circulation or borrowing from international markets. Besides, the US entered the growth phase much earlier than the EU did, thanks to the dynamism of its markets.
China, on the other hand, is getting its own way on almost everything. Economic theories almost seem not to apply to this country. Its public banks are in a terrible situation with increasing liabilities and non-performing loans. However, since its savings are high and its markets enjoy large quantities of foreign capital inflow, China’s need for fiscal and monetary productivity is not even a matter of question in any analysis. Besides which, the Chinese yuan is not sufficiently valued, creating a risk for the world. However, in a clever move, China removed this fact from the summit’s agenda by moderately increasing its currency value a few days prior to the meeting in Toronto.
Furthermore, the participants didn’t even mention taking concrete steps towards creating a regulatory and auditing mechanism for the financial sector, which was indeed responsible for the world financial crisis, despite the G-20 incessantly emphasizing avoiding wrong decisions that may endanger future growth. What is more, high-ranking representatives of these countries discussed the hazards of retaining high public deficits and debt loads that would make the recovery of the global economy excessively vulnerable.
In my opinion, the restructuring of the financial sector should have been made the biggest priority. Applying the universal and humanitarian principles of Islam to the financial sector would contribute to the withering away of at least some of the poisonous aspects of capitalism and help to establish a sound mechanism of oversight and regulation.
Let me briefly summarize the essence of what I mean here. Islam prohibits implementing excessive leverage on investments. This prevents the utilization of various derivative products that may hurt an otherwise, healthy relationship between lenders and borrowers. It prevents the transfer of debts to third persons by modifying the original contract between the lender and the borrower. In other words, the consequences of a failure to pay a debt would be limited to the two parties involved, since the channels of contagion are already closed off by the prevention of the transfer of liabilities of a debt contract to third parties.
Similarly, contracts agreed to in an environment of excessive ambiguity, risk and unequal access to information are also not valid or legitimate in Islam. The major principle as regards debt contracts is transparency. Just a warning, this particular emphasis on openness does not mean that we should neglect Islam’s promoting taking and sharing risks when necessary.
To conclude, during the latest G-20 meeting, causes were under the limelight, not results. For this reason, it failed to bring about necessary compromise on at least one, single concrete step towards recovery.
