The “Action Plan” of co-ordinated measures proposed for the G-20 Leaders’ Summit at Cannes on November 3-4 by the Finance Ministers from advanced and emerging economies significantly set a time limit of eight days for the European Council (already due to meet on October 23) to “address the current challenges (sovereign debt and banking capital problems) through a comprehensive plan”. These expectations were, however, lowered in German reactions soon after the G-20 meeting, despite an existing accord between the two strong majors, Germany and France, on what needs to be done at last.

The G-20 Communique of Ministers who included Finance Minister Mr Pranab Mukherjee said they remained committed to take all necessary actions to preserve the stability of banking systems and financial markets. It set out actions to be taken by advanced and emerging nations “to restore confidence, financial stability and growth”.. The action plan to go before the Cannes Summit will encompass a set of measures to address “immediate vulnerabilities and strengthen the foundations for a strong, sustainable and balanced growth”

Advanced economies, under the plan, would adopt policies to build confidence and support growth, and implement credible steps to achieve fiscal consolidation. Those with large current account surpluses (like Germany) are enjoined to implement policies to shift to growth based more on domestic demand while those with large current account deficits (USA) would try to increase national savings.

Emerging market economies are to adjust macroeconomic policies, where needed, to maintain growth momentum in the face of downside risks, contain inflationary pressures and endeavor to enhance resilience in the face of volatile capital flows. Apparently with China in mind, the action plan calls for surplus emerging market economies to accelerate the implementation of structural reforms to rebalance demand toward more domestic consumption.

IMF had warned in a note to G-20 that the global economy had entered a dangerous phase, and policy makers need to take concerted action to tackle the challenges “Collective action can put the global economy on a path to strong, sustainable, and balanced growth,” the IMF said. Even with policies to prevent downside risks, there would be an ”anemic recovery in major advanced economies and a cyclical slowdown in emerging economies”.

On contentious US-China issues related to “undervaluation” of Chinese yuan and exchange rate flexibility, the communiqué said the surplus emerging market economies would make continued efforts to move toward “more market-determined exchange rate systems and achieve greater exchange rate flexibility to reflect economic fundamentals”. All countries would undertake further structural reforms to raise potential growth and foster job creation and social inclusion.

At the meeting Finance Ministers from Japan and Canada had raised the exchange rate volatility issues while Mr Pranab Mukherjee of India and Mr. G. Mantego (Brazil) cited how Europe’s current problems had become global, with the closely integrated financial markets, thus underlining the urgency of actions to prevent destabilization of the global economy resulting from imbalances in a small economy in a currency union. Already, Mr Mukherjee pointed out, the robust recovery in emerging market economies had begun to falter. (China down to 9.1 per cent in third quarter of 2011 and India’s growth lowered to around 8 per cent in 2011)

The Eurozone leaders have been too slow to act on their decisions of July 21 to increase the capacity and the flexibility of the European Financial Stability Framework (EFSF). The G-20 communique said the Ministers looked forward to a set of actions including maximization of the impact of EFSF in order to avoid contagion at the European Council on October 23 comprehensive plan. (EFSF at present has 440 billion euros – (609 billion dollars). How to capitalize the banks in distress or those which would take the hit if there is debt default or write-down in Greece, is one of the key issues involved.

The present crisis being entirely one within the developed world, emerging economies and other developing countries have strongly urged Europe, United States and other advanced economies to take effective and urgent steps to prevent the global economy from slipping into a double-dip recession. This was voiced at the IBSA Summit at Pretoria where Prime Minister Manmohan Singh said their countries could not remain untouched by the negative impacts of market turmoils in the traditional engines of global economy. EU leaders were urged to come up soon with a “credible recovery plan instead of damage control”.

IMF Chief M. Christine Lagarde, who had discussions with EU leaders, also emphasized the importance of boosting bank liquidity to avoid a deeper economic dislocation and ease bank funding strains. “Capital buffers are needed to withstand further turmoil, boost confidence, and get credit flowing again—which in turn will boost growth and employment”, she said.

In the G-20 communique the Ministers said they were committed to take all steps to preserve stability of banking systems and financial markets. “We will ensure that banks are adequately capitalized and have sufficient access to funding to deal with current risks. Central banks have recently taken decisive actions to this end and will continue to stand ready to provide liquidity to banks as required”.

Mr Mukherjee had raised pointedly two issues, one on G-20 refocussing on growth, as after the Pittsburgh Summit of November 2009, two years were lost with concerns about imbalances, fiscal and external, leaving inadequate attention to internal imbalances i.e. shifting demand back from the public sector to the private. The current indicators show that both private consumption and investment sentiments have further weakened, he said. Rebalancing global demand should not weaken but strengthen the growth impulses such as through increased investment in infrastructure generally and a more liberal flow of technology to developing countries.

Secondly, he cited the serious challenges to the world economy posed by tax evasion and illicit flows and called for exchanging information for improving tax compliance with partner countries as well as exchange of past banking information and assistance in collection of taxes. He hoped it would be one of the deliverables at Cannes. The Paris communiqué said Ministers looked forward to discussion of progress made in tackling non-cooperative jurisdictions and tax havens in Cannes. “We underlined in particular the importance of comprehensive tax information exchange”, it said, a reference which Mr Mukherjee later welcomed as a positive.

A proposed capital surcharge of 1 to 2.5 per cent on systemically important financial institutions found support among some FMs and central bankers, but not India at present. If not at Cannes, a financial transaction tax as a buffer against future banking crises is bound to figure at G-20 meetings later in Mexico, which takes over the presidency from France for 2012. (IPA Service)