After two days of negotiations, leaders of the world’s top 20 economies appeared open to a faster reduction in deficit levels over the next three years and also to cut debt, but over a slightly longer time frame.
But a consensus is still eluding the Group of 20 (G20) countries, which account for 85 per cent of the global economy, on bank transactions to fund future bailouts.
The problems in the financial sector and those related to sovereign debt in the euro zone are also casting a shadow on the completion of the Doha Round of trade liberalisation. The 2010 deadline for the negotiations to conclude, fixed by the G20, is set to be missed, but little is being done to put the process back on track.
Apart from refocusing on reduction of oil subsidies, a touchy issue with India, there are few signs of a consensus on most issues. There is little that is known on the new steps that are being contemplated to strengthen the rules governing the financial sector. A Reuters report said the leaders were likely to agree on a flexible timetable for banks to adopt stricter capital rules as a concession to a still-fragile financial sector.
The final communiqué is expected late afternoon (early hours of Monday in India).
Cut deficit, decide your pace
The G20 may settle for a statement that will state the member-nations intent to halve their deficits and cut the debt-gross domestic product ratio (GDP) over the next few years. But, it is unlikely to include penal provisions in case deadlines are missed.
Led by the United States, most of the non-European members are against a sharp cut in economic stimulus introduced at the height of the 2008 global financial crisis to ensure the revival process did not falter. While noting the recovery was underway, US Treasury Secretary Timothy Geithner said “the scars of this crisis are still with us.”
The developing countries, such as India and Brazil, are also in favour of moderating the tempo as they fear that a sharp cut in developed markets will affect their exports.
In his speech, Indian Prime Minister Manmohan Singh today said that a contractionary fiscal policy across developed countries could cause double-dip recession as the global economy remained fragile, demand was weak and unemployment rates were high. Besides, he said deflation was a bigger threat than inflation. Singh, however, added that India had already announced a timetable to halve its deficit and higher growth will take care of debt reduction.
The Brazilians, who are blaming the policies of developed countries for global economic woes, adopted a more aggressive posture on the European and Canadian proposal. “It is draconian, a little difficult, a little exaggerated,” said Brazilian Finance Minister Guido Mantega, who is filling in for his President Luiz Inacio Lula da Silva. “Some countries would not be able to do it. It is clear that a cut is needed, but at what velocity? It can’t be too fast,” he added.
In contrast, European countries, saddled with high levels of debt, are demanding a rapid reduction in deficit levels, while Canada, the host, is pushing for an agreement on cutting by half the debt-gross domestic product (GDP) ratio by 2013. The US wants the deadline for a 50 per cent cut be a year later.
According to Reuters data, the aggregate debt of advanced countries in the G20 is expected to hit 107.7 per cent of GDP this year, almost three times the 37 per cent debt forecast for emerging market economies of the group, and up from 80.2 per cent at the outset of the crisis in 2007.
A meeting of G8 leaders on Friday also recognised that recovery remains fragile and left it for G20 leaders to decide on how to tackle the situation.
Tax on banks
The other contentious issue of tax on bank transactions to fund future bailouts, too, has not seen the emergence of a common position.
Again, an official said, individual countries will be given a choice on levying the tax, which Britain, Germany and the US are likely to impose.
Countries such as China, India and Brazil, where banks got away largely unscathed by the financial crisis, are against the move being pushed by the Europeans.
“There is a difference in the level at which banks are, so you cannot tax everyone for some people… Why should we pay for other countries’ problems?” a senior Indian official had said on the eve of the meeting.
Last-minute efforts
While sherpas from the 20 countries have been trying to bridge the gaps, the leaders joined the efforts last evening amid protests, but there were no signs, at least publicly, of anyone country changing its stance.
“Discussions in the G-8 have shown that it is possible to reconcile some conceptual differences,” European Commission President Jose Barroso told reporters. “We expect the G-20 to agree on concrete targets for deficit reduction and the stabilisation and reduction of debt.”
Officials said every effort will be made by the time the communiqué is issued late Sunday afternoon (local time) to send a message to the markets that leaders are working together to strengthen rules and stabilize the global economy.
After all, G20 has now emerged as the predominant forum for coordinating efforts to tackle the global economic challenges. This is the fourth G20 since the global financial crisis in 2008 fuelled fears of a new Great Depression.
Canadian Prime Minister Stephen Harper said a “sensible consensus” appeared to be emerging on both economic strategy and financial reforms.
