G20 Finance Ministers and Bank Governors meet at the IMF Headquarters in Washington, April 15, 2011. - Photo by Reuters.
WASHINGTON: At least seven of the world’s leading economies will undergo scrutiny of their economic policies under a new plan to help prevent future financial crises like the one of 2007-09.All Group of 20 countries will be judged on indicators such as debt and budget deficits as well as trade and investment flows, and may face reviews by the International Monetary Fund which could lead to suggestions for policy fixes.
At least seven major economies will automatically go into the so-called second stage reviews, based on their size.
Those nations are the United States, China, Japan, Germany, Britain, France and India, according to G20 officials.
Any policy fixes suggested by the IMF will not be binding.
Instead the group hopes that peer pressure will work to smooth out dangerous imbalances in the world economy.
Below are summaries of the policy challenges in the seven countries that will undergo automatic review.
UNITED STATES
The world’s biggest economy’s public debt has swelled to more than 60 per cent of annual economic output. With a budget deficit of about 10 per cent of output, it will grow further.
The Obama administration is likely to respond to any G20 calls for fiscal discipline by pointing to its newly announced plans to hack $4 trillion from the budget deficit over the next 12 years through spending cuts and tax hikes on the rich.
The IMF has cast doubt about Washington’s ability to meet a previous goal of halving its deficit by 2013, and his current goal announced this week is to reduce the deficit to 2.5 per cent of gross domestic product by 2015.
What Washington most wants from the G20 process is to get China to rely more on domestic consumption and less on exports, a move that would open up opportunities for US business.
CHINA
China, now the world’s No. 2 economy, this week reported its foreign-exchange reserves topped $3 trillion. In the years leading up to the financial crisis, much of this cashpile was invested in Western markets and helped fuel excessive risk-taking by banks. That in turn led to the worst financial crisis since the Great Depression.
The United States claims China saves too much and spends too little because it keeps the yuan undervalued against the dollar, thus aggravating Washington’s trade deficit.
China has said repeatedly it will only let the yuan rise gradually — it’s up more than four per cent against the dollar since mid-2010 — and has expressed skepticism about the G20 guidelines, seeing them as one more form of Western pressure.
The G20 communique said the new policy mechanism would take “due account” of exchange rates among other policies, appearing to give China room to keep the yuan off the table.
JAPAN
Japan will come under scrutiny for its huge current account surplus, which stands at around three per cent of its total economy.
Tokyo probably won’t object to any peer review process as it can argue that the surplus will soon take care of itself.
That’s because an aging population will lead to a falling savings rate and reduce the amounts that Japanese investors have available to invest overseas. Japanese officials have said submitting to a review may also be helpful in nudging China into doing the same.
GERMANY
With all the focus on China, Germany often slips beneath the radar when talk turns to export-driven economies. The country ran a surplus on its current account, the broadest possible measure of trade and investment flows, of about 5.3 per cent of output last year, though the IMF sees that dipping a bit this year.
Subjecting Germany to an in-depth review may be complex as Europe’s position is that the entire 17-country euro zone should be examined if any of its members are named.
From that angle, Germany’s situation will look more benign, as its surpluses and those of other northern European countries would offset deficits in countries such as Italy, Spain, Greece and Ireland, leaving the euro zone largely in balance and reducing the likelihood of any calls for policy fixes.
BRITAIN
Britain’s biggest challenge is its budget deficit, which jumped above nine per cent of gross domestic product on an internationally comparable basis in the 2009/10 fiscal year. A rapidly rising debt-to-GDP ratio and high private sector indebtedness are also likely to spark concern.
However, Britain’s finance minister, George Osborne, welcomed the possibility of closer scrutiny by the IMF on Friday. Britain’s coalition government of Conservatives and Liberal Democrats, which came to power in May 2010, blames the previous Labour administration for the hefty deficit, and set out a five-year plan to largely eliminate the budget deficit in an emergency budget a month after taking office. The scale of the cuts is likely to provide London with a strong case to make to the rest of the G20 that it is dealing with its problems, even if they are unpopular among voters at home.
