Last Friday and Saturday the G-20 finance ministers and central bank governors met in London to pave the path to the third G-20 economic summit of heads of state and government Sept. 24-25 in Pittsburg, Pennsylvania. The first summit on Nov. 15 in Washington, D.C., and the second one on April 2 in London convened as the world economy faced the apocalypse of another global depression in the midst of the worst financial crisis since the 1930s. (See my columns The G-20 economic summit (1) and (2), Nov. 17 and 24, 2008, and Second G-20 economic summit scorecard (1) and (2), April 6 and 13, 2009.) These two summits were widely criticized for not coming up with specific and effective measures to prevent the current crisis from worsening and to avert future crises. But in the final analysis they confirmed the feasibility and usefulness of international economic cooperation among the world's leading advanced and emerging economies, including Turkey. We should remember that the lack of such cooperation during the Great Depression of the 1930s deepened and prolonged the global crisis with disastrous consequences for every country.
In the days leading to last weekend's London meeting of the G-20 finance ministers and central bank governors, among the several issues two were expected to dominate their agenda: (1) exit strategies for winding down and ending the fiscal and monetary stimuli, aimed during the last 12 months at ending the global financial and economic crises, as the latest indicators signal earlier than previously expected recovery; and (2) capping bankers' bonus compensation and tying it to long-term performance to prevent excessive risk-taking for short-term profits in order to avert systemic risk to the financial system (and for political expediency to appease the public anger at the return of bankers' perceived exorbitant greed as the banking sector recovers thanks to taxpayer-funded bailouts).
During the days before the G-20 ministers' March 2008 meeting and in the following weeks prior to the second G-20 summit in April 2008, we had witnessed a split and debate between the EU and the US on the G-20 summit agenda issues and how those issues should be tackled. (See my columns Contention over the second G-20 economic summit (1) and (2), March 16 and 23, 2009.) During the week preceding the G-20 ministers' meeting last weekend, we saw a similar split and debate, which might become even more contentious as the easing of the global crisis lessens the need for compromise and consensus. The G-20 ministers were charged with discussing the split and bridging the divide before the Pittsburg summit. Their task was not an easy one.
As for the exit strategies from fiscal and monetary stimuli, there was a split and debate between the EU (except the UK) and the US on the timing and extent of the exit. The EU, especially Germany, concerned about ballooning budget deficits and the danger of runaway inflation, argued for speedier exit, whereas the US urged a slower exit lest the recovery is nipped in the bud with the premature withdrawal of government support for the financial system and the real economy. The EU's argument received additional support when the Organization for Economic Cooperation and Development (OECD) released its interim assessment of the economic outlook for 2009 last Thursday, which signaled a faster and stronger recovery than had been expected only a few months ago. But the news of the US unemployment rate jumping to 9.7 percent last month, the highest in 26 years, despite the widely held belief that US recession was already over, made the Obama administration more emphatic about its concern that premature ending of government support for the economy could delay the complete recovery toward full employment. The BRICs (Brazil, Russia, India and China) favored the US position. Despite the better-than-expected forecasts of recovery, both the OECD and the International Monetary Fund (IMF) cautioned against declaring the crisis over and prematurely either ending the government spending programs and raising taxes or hiking short-term interest rates. There is consensus that because of spillover effects international coordination is essential to the implementation of optimal exit strategies, as such coordination was also essential to the implementation of optimal fiscal and monetary stimuli to fight the global crisis.
As for putting caps on bankers' bonus payments and tying them to long-term performance to prevent excessive risk-taking for short-term profits in order to avert systemic risk to the financial system, the EU (with the UK ambivalent), especially France, appeared to regard this issue as essential for financial regulatory reform. Their position was argued in a letter signed by the finance ministers of Sweden, the Netherlands, Luxembourg, France, Spain, Germany and Italy to the Financial Times last Friday. Although there was consensus at the London G-20 summit on reviewing the remuneration of financial sector executives to eliminate dysfunctional incentives that create systemic risk and instability, the issue was nowhere as paramount and heated as it has now become. The EU recognizes that unless the US and other major non-EU countries agree to restrict compensation of financial sector executives in similar if not identical ways, its policies toward that objective will be ineffective at best and self-defeating at worst. The US position is that except for financial institutions that benefited from government bailouts, the imposition of caps on executive compensation of publicly owned companies is populist and discriminatory government intrusion of dubious economic benefit into the private sector. If the objective is financial regulatory reform, then pay caps are of questionable value -- compared with countercyclical and risk-weighted bank capital requirements and liquidity standards as well as “living wills” for the orderly resolution of supposedly too-big or too-interconnected-to-fail banks -- in aligning proper incentives with financial system stability.
In next week's column, I will discuss the outcome of the G-20 finance ministers' London meeting, assessing their success in paving the path toward the Pittsburg summit.
