CIGI Commentaries, September, 2011
In early August and in September, G7 governments met and pledged to take the necessary measures to support financial stability and growth, and reassure fragile financial markets. The financial press reported that market participants and economists dismissed the statements as vacuous and insufficient. The view was that global measures that do not include the major emerging economies — in particular China — are meaningless.
The return of market volatility has shaken the confidence of a fragile recovery. How are leading economies responding? Is the current turmoil giving way to another free-fall in global markets? Are the international governance mechanisms, established after the last crisis, up to the task of averting another crises? What can the major powers do? In this timely commentary series, CIGI experts examine these key issues, and offer recommendations for policy makers looking to restabilize the world economy.
Friday, 30 September 2011China in the Current Financial Turmoil
Friday, 30 September 2011Should We Be Feeling More Secure? The Limits of International Regulatory Reform
The financial upheavals of the past few weeks have led some to predict that we could well witness a repeat of the global financial meltdown of three years ago. But haven’t G20 policy makers been working diligently since then to make the global financial system safer and more shockproof?
Recent volatility in world financial markets has reinforced the case for international financial regulatory reform. And yet at this very moment, despite all the promises and “commitments” made, the reform agenda endorsed at G20 summits since 2008 is in serious danger of stalling or even sputtering out on essential issues.
Mexico is thinking about its hosting of the 2012 G20 summit. The Ministry of Finance, the Sherpa office and other offices in the Ministry of Foreign Affairs, Labor and Agriculture are planning well in advance to help ensure a successful summit next June. Mexico’s scope for sculpting the agenda and preparatory process will be influenced by developments in the current economic turmoil — the G20’s priority will be action to avert a downturn scenario. Economic and financial issues may monopolize attention, sidelining non-financial issues for the moment.
The G20’s effort to tackle the global problem of corruption, arguably one of the group’s least anticipated and most unsung success stories, builds on work started by the G8 and other entities. The G20’s anti-corruption efforts, linked to the increased accountability, credibility and transparency of the global financial system, have led to deeper institutional engagement and laid the grounds for further progress.
The global economic recovery has lost considerable traction over the past six months, with both headwinds and downside risks having increased. Anemic growth in major advanced economies has become more entrenched, and unacceptably high levels of unemployment show no sign of decline. Uncertainty about the direction of policy, verging on a crisis of confidence, represents one of the major obstacles to achieving a more robust global recovery and stronger growth over the medium term.
How will the major emerging economies of Brazil, China and India be affected by the current wave of financial instability? Lower stock prices in the United States and Europe have lowered growth expectations in all three of these countries, along with their stock prices. Higher interest rates due to the higher default risk in OECD countries also affect them. The volatility that has affected stock markets in these three economies is, therefore, the same as it is elsewhere. But will the instability spread more widely within their financial sectors and economies more broadly, impairing their growth performance?
As volatile share markets have fallen around the world in recent weeks, central banks are once again faced with the question of how to stabilize the financial markets. Unlike the crisis in 2008, current market volatility is not due to worries about the creditworthiness of private borrowers and their impact on financial institutions. The situation today is partly a consequence of the fiscal policy actions taken by governments in 2008, and partly the inability of central banks to bolster confidence and stimulate lending.
The summer of 2011 was not a time when key players in the international economic arena could relax on the beach. With the world facing an international economic crisis, one might have expected that the world’s “premier forum for international economic cooperation” — the G20 — would have been centre stage. Indeed, former UK Prime Minister Gordon Brown called for a special meeting of the G20. It did not happen.