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G20−meeting: Tobin tax steals headlines

Mon, Nov 9 2009, 09:51 GMT
by Flemming J. Nielsen

Danske Bank A/S

• With G20 countries on a time schedule for coordinating and reviewing individual countries’ economic policies, the process already revealed some weakness as G20 was not able to agree on more specific policy goals.
• UK Prime Minister’s proposal to tax financial transactions is dead on arrival. However, a special tax on financial institutions to finance future bailouts remains on the agenda.
• Exchange rates issues were avoided in the final communiqué. However, IMF believes CNY is significantly undervalued and it will be hard to avoid exchange rates issues in the review process starting early next year. In addition, IMF put forward seven basic principles for exit policies.

Too early to withdraw stimulus

There was very little news in the final communiqué from the G20 finance ministers’ and Central bank governors’ meeting in St. Andrews, Scotland, see G20 Communiqué. The meeting was mainly about pushing ahead the ambitious agenda from the Pittsburgh summit.

On the policy front it was agreed that stimulus measures should not be withdrawn until the recovery is assured. However, G20 countries should start to develop and communicate exit strategies. In a report note prepared for the G20 meeting, IMF laid out seven basic principles for policy exit, see IMF note. These include that policy makers should err on the side of further supporting demand and financial repair; fiscal consolidation should be top policy priority and monetary policy should be adjusted flexibly; unconventional monetary policy does not necessarily have to be unwound before conventional monetary policy is tightened.

G20 agree on time schedule for review process

The G20-countries agreed on a more specific time frame for the “Strong, Sustainable and Balanced growth” (SSB) review process agreed upon at the G20 meeting in Pittsburgh. This is an attempt to coordinate macroeconomic policies globally. According to this schedule individual G20 countries will have to submit their economic plans by January 2010. The review of the individual countries by the G20 group and IMF should be concluded by April 2010 and final policy recommendations should be ready for final approval by the G20 heads of state in June 2010. Arguably some weakness in the SSB-process has already been revealed, as the G20 countries have not been able to agree on more specific policy goals besides the broad SSB-headline.

Pressure on China will increase next year

As in the Pittsburgh final communiqué there was no explicit mention of exchange rates in the communiqué from St. Andrews. However, in its report to the G20 summit IMF revealed where it currently stands. IMF believes that “..the Chinese renminbi is significantly undervalued from a medium-term perspective”. IMF believes USD has moved closer to its medium-run equilibrium, but probably remains slightly overvalued in real effective terms. While we still have doubts about the effectiveness of the SSB-process, it will be hard to avoid discussing exchange rates in the review process. Hence, pressure on China should increase early next year.

Time schedule for financial regulation maintained

Concerning financial regulation the G20 countries reiterated their time schedule. A final proposal should be ready by end-2010 to be phased in as financial conditions and the economy recovery are assured, with the aim of final implementation by end-2012. While several countries have put forward proposals on some of the subjects, the all important next step will be the publication of the Basel Committee’s proposal (this is expected to happen before year-end). This proposal will cover new capitalization rules, a proposal for a new liquidity pillar in regulation, limits on financial leverage and a special regulatory environment for systemic important financial institutions.

Tobin tax proposal dead on arrival

UK Prime Minister Gordon Brown stole the headlines when he - in a speech to the G20-Summit - among other things proposed a tax on financial transactions (so called Tobin tax). Gordon Brown’s proposal is dead on arrival as US Treasury Secretary Timothy Geithner, ECB board governor Jean-Claude Trichet and IMF president Dominique Strauss-Kahn all rejected the proposal. That said, it was agreed at the Pittsburgh summit that a tax or fee on the financial sector to finance future bailouts should be considered. IMF will put forward a proposal at the G20 summit in April 2010, but it has already made clear it will not include a Tobin tax.

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Published on  Mon, Nov 9 2009, 10:03 GMT