“Now and over the years to come, the issues the G20 will have to confront will be as varied as there are pebbles on the beach.” This was the key message delivered by Paul Martin during the opening of the T20 conference in Ottawa from May 3rd to 5th. The focus of the conference was on enhancing international monetary and financial cooperation, but the topics were repeatedly linked to the role of the G20 in strengthening multilateral institutions, hoisting the representation of emerging markets and developing countries in global economic governance, and addressing climate change.
In doing so, the conference featured five themes that represent a key risk for the global economy and presently offer key opportunities to strengthen global governance.
- Special Drawing Rights (SDR)
SDRs are the reserve asset used and managed by the International Monetary Fund (IMF). Although the SDR has largely been viewed as an irrelevant component of the international monetary system since the end of the gold standard, this year represents an opportunity to redefine its role. The IMF Executive Board will be reviewing the SDR basket later this year and, although this occurs every 5 years, the rise of importance of emerging market and developing countries to the global economy marks an opportunity to change the purpose of the asset. Among other proposals, several participant’s argued that the SDR could be transformed into a signalling mechanism for a change in global finance and serve to promote inclusiveness in the international monetary system by broadening the basket to include currencies of small-open economies (for example, the Canadian and Australian dollars) and emerging market economies (for example, the Chinese Renminbi and Indian Rupee).
- Global Macroeconomic Imbalances and Macroprudential Policies
Amidst strong economic performance, the United States and the United Kingdom are deciding on when to tighten the stance of their monetary policy. At the same time, China’s economy is slowing down and weaker commodity prices are hurting many emerging market economies. In addition, central banks in some advanced economies have resorted to surprising markets to stimulate their more sluggish economies. Divergences in the global economy and the perceived retreat to “every person for themselves” mentality are creating potentially destabilizing financial conditions. Against this backdrop, a panel of high level participants discussed the role of G20 central bankers and finance ministers in facilitating cooperation in decreasing global financial volatility. Proposals included a framework of multilateral forward guidance and strengthening cross-border macroprudential regulation, while still recognizing the current limitations of these policies.
- Managing Severe Sovereign Debt Crises
The situations in Greece, the Ukraine, and the revival of a crisis past in Argentina, along with uncertainty over the role of the IMF, emphasize the ongoing importance of creating a coherent and reliable mechanism for dealing with sovereign debt crises. Although there were several differences among participants on how to deal with this issue, there was clearly a consensus over the urgency of finding a solution. Proposals varied from contractual or statutory to institutional reforms to treaty-based solutions, with each one facing their own benefits and costs.
- International Financial Regulatory Reform
Since the 2008 global financial crisis, a key area of success for the G20 has been its progress in developing and implementing international financial regulatory standards. It is not time to be complacent, however, as much remains to be done in reforming global financial regulation. Participants emphasized the need to complete reforms on too big to fail that are credible and, in recognizing that sometimes banks do fail, underscored the importance of creating a harmonized resolution mechanism. The discussion also highlighted the value of being inclusive in defining global regulations to ensure that they are applicable to emerging market and developing countries operating with structurally different financial systems.
- Environmental and Sustainability Risks
Addressing climate change and environmental risks through global financial regulatory reforms stood out as the most important theme of the conference. Discussant’s agreed that climate change is: (i) currently the largest risk to the global economy and financial system; (ii) an issue for leaders and finance ministers, rather than just for environment ministers who are not even involved in the G20 processes, and; (iii) a societal imperative in which we must act now for it to be adequately addressed. Not only is the issue imperative, but this year represents a key opportunity to enact change because the G20 Leaders Summit takes place the month before the UN Climate Change Conference in Paris in 2015 where leaders are expected to develop a binding international agreement on addressing climate change.
CIGI will be releasing a conference report shortly that will provide further details of the discussion at the T20 conference and key recommendations that emanated from it.