BBC News (Link) - Barak Ravid (April 15, 2011)
Finance ministers and central bankers from the G20 have agreed a set of “indicative guidelines” to measure potential risks to the global economy posed by national economic policies.
All members of the G20 will be monitored under the new system.
In addition, members who account for more than 5% of total G20 economic output will be subject to a deeper, second-stage analysis of imbalances.
They include the US, China, Japan, Germany and France.
This is to “reflect the greater potential for spillover effects from larger economies,” the group said.
The G20 did not formally name the countries this would apply to but French Finance Minister Christine Lagarde said that France would be one of seven in total to face higher scrutiny.
The group was meeting in Washington, ahead of the spring meetings of the World Bank and the International Monetary Fund (IMF).
The G20 accounts for 85% of global output and is now the main forum for trying to reform the world’s financial system.
Many economists believe that global imbalances contributed to the recent financial crisis.
Emerging market countries reinvested their surpluses in Western markets, causing banks to take excessive risks, so the argument goes.
Finance ministers agree that they must find a solution to these kind of imbalances.
But countries disagree over how quickly they need to act.
China recognises that it must open its economy and allow its currency, the yuan, to get stronger, but it wants to do it at its own pace.
The US, on the other hand, wants to see this happen much faster.
After its last meeting in February, the group reached a deal on indicators to detect the economic imbalances.
The Washington deal on measurement applies to these indicators, which include public debts and deficits, and private debt levels and savings rates.
In its latest communique, the G20 said its monitoring would use four approaches:
estimating what a country’s imbalances should look like using economic models specific to that country
looking at a country’s imbalances in terms of their national historical trends
comparing a country’s imbalances with groups of similar countries
comparing a country’s imbalances with the full G20.
The last three approaches will use statistics from 1990 to 2004 “as this is the period that preceded the large build-up in external imbalances,” the communique said.
“Those countries identified by at least two of the four approaches as having persistently large imbalances will be assessed in-depth to determine in a second step the nature and root causes of their imbalances and to identify impediments to adjustment,” the group said.
The second step of assessment would be carried out independently by the IMF.
“The guidelines operate a little bit like a net which actually holds those of the countries that violate or do not respect the guidelines,” said Ms Lagarde, who chaired the meeting as France currently holds the presidency of the G20.
“And the net is a little bit tighter for those countries that are considered of systemic importance because they represent more than 5% of the GDP [gross domestic product] of the G20.”
However, the group made no mention of any “name and shame” list which would identify those members in the most risky positions.
Although the global economy appears to be on the path to recovery, the meeting took place at a time when plenty of threats to growth remain.
Among the challenges are unrest in the Middle East, high oil prices, continued inflation in China and debt problems in Europe.
The head of the IMF, Dominique Strauss Kahn, told the BBC that some policy makers thought “the crisis was behind us” and this was “the wrong attitude.”
In Europe, he said, there was no room for complacency regarding high levels of debt.
“A lot more has to be done by the Europeans to fix the [debt] problem,” he said. †