TWN Info Service on Finance and Development (Feb09/04)
21 February 2009
Third World Network

G7 pledges to stabilise global economy, avoid protectionism
Published by SUNS #6641 dated 17 February 2009

Geneva, 16 Feb (Kanaga Raja) -- The Group of Seven (G7) Finance Ministers and Central Bank Governors, meeting in Rome on 13-14 February, agreed to accord their highest priority to stabilising the global economy and financial markets, as well as to avoid protectionist measures, refrain from raising new barriers and to work towards a "quick and ambitious conclusion" of the Doha Round.

The Group met in Rome, Italy to discuss ways to address the ongoing and severe global economic downturn and turmoil in the financial markets.

The G7 comprises the leading industrialized countries, namely, France, Germany, Canada, Japan, Italy, the United States and the United Kingdom. The group though no longer controls or is in the drivers' seat vis-a-vis the international monetary and financial system -- and other economies like China and India have emerged, and can no longer be ignored.

The G7 meeting comes just before a summit of G20 leaders is to take place in London in April to further discuss the global financial system. The G20 summit in April is a follow-up to the first G20 summit which took place in Washington last November.

The G7 meeting also took place just as the US Congress on Friday gave the nod to US President Barack Obama's massive $787 billion stimulus package aimed at kick-starting the troubled US economy. The package comes on the heels of an announcement earlier in the week by US Treasury Secretary Timothy Geithner of a whopping $2.5 trillion bailout plan for US banks.

Other G7 countries such as France, Canada, Italy, Japan, the United Kingdom and Germany had also earlier instituted bailout measures and guarantee schemes for their troubled financial institutions. Some of them, such as the United States, Germany and France, also came to the aid of their auto industries, which have been hard hit by the global downturn, by providing billions of dollars worth of loans.

In a communique issued on Saturday, the G7 finance ministers and central bank governors said: "The stabilisation of the global economy and financial markets remains our highest priority. We have collectively taken exceptional measures to address these challenges and we reaffirm our commitment to act together using the full range of policy tools to support growth and employment and strengthen the financial sector."

The G7 said that the financial measures taken by each of its members are helping to stabilise extremely volatile financial markets.

These actions aimed at restoring normal credit flows to the economy follow three approaches as needed:

(1) enhanced liquidity and funding through traditional and newly created instruments and facilities;

(2) strengthen the capital base according to the competent authority's assessment of individual financial institutions; and

(3) facilitate the orderly resolution of impaired assets. The G7 commits to take any further action that may prove necessary to re-establish full confidence in the global financial system.

"We will continue to work together and to cooperate to avoid undesirable spillovers and distortions." said the communique.

What started as financial turmoil has now gripped the real economy and spread throughout the world. The severe downturn has already resulted in significant job losses and is expected to persist through most of 2009.

According to the communique, the policy response by the G7 has been prompt and vigorous, its full effects will build over time.

"Policy interest rates have been reduced to very low levels and unconventional monetary policy actions are being taken as appropriate. Budgetary action has been resolute. In addition to the full functioning of automatic stabilisers, substantial further fiscal stimulus packages are being implemented.

"By taking action together, the effects of our individual actions will be boosted. Our fiscal policy measures adhere to principles that will increase their effectiveness."

* be front-loaded and quickly executed.

* include the appropriate mix of spending and tax measures to stimulate domestic demand and job creation and support the most vulnerable.

* increase longer term growth prospects, addressing structural weaknesses through targeted investments.

* be consistent with medium-term fiscal sustainability and mostly rely on temporary measures.

The G7 also welcomed and appreciated the prompt macro-economic response from others throughout the world.

In particular, the G7 welcomed "China's fiscal measures and continued commitment to move to a more flexible exchange rate, which should lead to continued appreciation of the Renminbi in effective terms and help promote more balanced growth in China and in the world economy."

This formulation is seen as an effort to ease tensions and the stance towards China -- and away from the recent remarks of US Treasury Secretary Geithner, who in his confirmation hearings before the US Senate, had spotlighted China and its currency, in remarks that were widely interpreted as virtually accusing China of manipulating the currency values and thus subsidising exports.

In its communique, the G7 reaffirmed its shared interest in a strong and stable international financial system. Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.

"We continue to monitor exchange markets closely, and cooperate as appropriate."

An open system of global trade and investment is indispensable for global prosperity, said the G7, adding that it "remains committed to avoiding protectionist measures, which would only exacerbate the downturn, to refraining from raising new barriers and to working towards a quick and ambitious conclusion of the Doha round."

The G7 also stressed the need to support emerging and developing countries' access to credit and trade financing and resume private capital flows. It is committed to explore urgently ways, including through multilateral development banks, to enhance this support.

This crisis has highlighted fundamental weaknesses in the international financial system and that urgent reforms are needed.

"We agree that a reformed IMF, endowed with additional resources, is crucial to respond effectively and flexibly to the current crisis. In this respect, we welcome the Japanese government's lending agreement with the IMF."

The G7 communique said that increased collaboration between the IMF and the expanded Financial Stability Forum (FSF) will be particularly important to develop a timely and reliable assessment of macro-financial risks.

"We also welcome the contribution of the World Bank and regional Development Banks to providing finance to emerging and developing countries affected by the crisis, using their resources effectively."

The G7 finance ministers have asked their deputies to prepare, in consultation with other partners, a progress report in four months on developing an agreed set of common principles and standards on propriety, integrity and transparency of international economic and financial activity.

The G7 said that it is committed to continue working with partners in international fora to accelerate reforms of the regulatory framework including limiting pro-cyclicality, the scope of regulation, compensation practices, market integrity and risk management. +