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21 December 2016

The Fi­nance Track un­der the Ger­man G20 pres­i­den­cy

  • In 2008 and 2009, during the worldwide financial crisis, the G20 became the central and most effective forum for global economic coordination and global governance.
  • At the level of finance ministers and central bank governors, German’s G20 presidency will focus on enhancing economic resilience, improving investment conditions (especially in Africa), and taking advantage of the opportunities that digitalisation has to offer in the financial sector.
  • Germany will ensure continuity with existing initiatives, particularly those that deal with the international financial architecture, resilient and innovative financial markets, and the implementation of tax agreements on base erosion and profit shifting.

The G20’s work

The first ever meeting of the G201 took place in Berlin in 1999 and was attended by finance ministers and central bank governors. The crisis in Asia had made it clear that globalisation had inextricably linked the world’s economies. In particular, it revealed that crises in developing and emerging countries can have a serious impact on industrialised countries, and that a globally interconnected economy calls for global economic and fiscal policy coordination. In 2008-2009, at the height of the global financial and economic crisis, the G20 process was expanded to include the heads of state and government. At the third G20 summit, which took place in Pittsburgh in November 2009, the G20 declared itself the main forum for international economic cooperation, also known as global governance.

In addition to the meetings of the finance ministers and central bank governors in what is known as the “Finance Track”, the heads of state and government also convene every year. These meetings are prepared in the “Sherpa Track”. There are also meetings between the ministers responsible for other policy areas (including labour, energy and agriculture). This article is about the finance ministers and central bank governors’ work programme during Germany’s presidency in 2017.

2008-2009: overcoming the financial crisis

Initially, the G20’s work mainly focused on effective global crisis management. After the onset of the global financial crisis in 2008, the group played a major role in stabilising economies and financial markets. But the G20 soon became more than a crisis management institution. It started to set international standards for financial market regulation, combat the creation of trade barriers, and fight back against currency manipulation. These topics dominated the first global financial summits in Washington (2008), London and Pittsburgh (2009), and Toronto and Seoul (2010).

In subsequent years, all G20 members made commitments to sustainable fiscal policies as well as to economic and structural reforms in their national growth strategies, which are updated on an annual basis. In the area of financial markets, the G20 agreed on a large number of joint measures to monitor and regulate the international financial system, not least in order avoid situations in which taxpayers have to bail out large, systemically important banks that are in financial distress (the “too big to fail” problem). Risks arising from financing outside the banking sector in what is known as the shadow banking sector were also reduced. This made financial systems more stable and resilient.

In addition, the G20 initiated comprehensive reforms of international financial institutions. The financial resources of the IMF and of multilateral development banks played a particularly important role in this context. Important advances were also made in the area of international tax policy, most notably steps towards achieving fairer international taxation. The G20’s agreements on enhancing tax transparency were pioneering, particularly those that set out to improve international information sharing and to combat base erosion and profit shifting (BEPS).

Current challenges

The direct consequences of the global financial crisis of 2008–2009 have largely been overcome. The global economy is currently growing at a pace close to its long-term average, but overall growth is less dynamic than it was following previous periods of economic weakness. Many countries have not yet reduced the high levels of debt they accumulated in their efforts to mitigate the direct impact of the crisis. Moreover, central bank interest rates in many G20 countries are at historic lows. In the event of another crisis, there would not be sufficient room for manoeuvre to cushion the blow through fiscal and monetary policy measures. Not least, many countries have become less willing to carry out structural reforms.

Priorities of the German G20 presidency in the Finance Track

Like the G7, the G20 is an informal forum. The G20 presidency rotates among the members on an annual basis and involves responsibility for organising various conferences, working level meetings and the summit of heads of state and government.

The troika, which encompasses the previous, current and subsequent presidencies, ensures the continuity of the G20’s efforts, which is essential if the G20 is to achieve lasting progress. Adopted measures must be implemented and compliance monitored. This plays an increasingly important role on the G20 agenda. However, despite each presidency’s commitment to continuity, there is scope for setting own policy priorities.

Germany officially took over the G20 presidency from China on 1 December 2016. An opening ceremony was held in Berlin on the evening of 30 November to launch the presidency’s Finance Track. It was attended by German Finance Minister Wolfgang Schäuble and Bundesbank President Jens Weidmann.

The deputies of the G20 finance ministers and central bank governors met at the Federal Ministry of Finance in Berlin on 1 December 2016. Following Wolfgang Schäuble’s opening address, Lars-Hendrik Röller welcomed the deputies in his capacity as the Federal Chancellor’s sherpa, her personal representative at the G7 and G20 summits. The deputies adopted the joint work programme under the leadership of the German deputies Ludger Schuknecht and Claudia Buch. The subsequent six working sessions focused on the topics on the G20’s fiscal policy agenda.

The priorities in the Finance Track under Germany’s G20 presidency are:

Strengthening economic resilience

Enhancing the resilience of the global economy is a key priority of Germany’s G20 agenda in the Finance Track. The aim is to make the world economy more robust by improving the resilience of each national economy in the group. This builds on the work on growth-enhancing structural reforms that was carried out under China’s presidency and expands these efforts to include the aspect of resilience. The aim is to improve economies’ ability to absorb economic shocks and their capacity to respond to long-term structural challenges, such as demographic change, in a flexible and timely manner. Measures aimed at creating sustainable debt levels, stable financial markets and better investment conditions are to be included in the annual national growth strategies, as are country-specific structural reforms. These growth strategies will be presented at the G20 summit in Hamburg.

Compact with Africa

In our increasingly networked world, it is important to build global partnerships that go beyond the G20. The G20 encompasses the world’s largest economies, including both industrialised and emerging countries. The group’s members have recognised that a shared future necessitates the welfare of all, and that the G20 can and must do its part to overcome challenges in the poorest countries, especially in Africa. For there to be sustainable development and employment opportunities in African countries, the conditions for private-sector investment and investment in infrastructure must be improved. This applies in particular to the financing environment. The G20’s “Compact with Africa” sets out to achieve this. The aim of the initiative is to encourage private-sector investment in African countries by improving macroeconomic, fiscal and economic policy conditions. Furthermore, the G20 will provide political support for specific investment agreements with African countries. The IMF, the World Bank and the African Development Bank will produce a report on existing initiatives and on reforms and instruments for improving macroeconomic, economic policy and fiscal policy conditions.

Taking advantage of digitalisation, mitigating risks

It is not possible to boost growth or create jobs without raising productivity. The German presidency intends to take advantage of the opportunities that digital technologies offer, especially in the financial sector. Better access to traditional and innovative financial services increases equality of opportunity, which potentially also helps to promote global stability. Nevertheless, we should also heed the risks that digital innovation can lead to. One important step is to look at existing regulatory approaches with the aim of assessing the possible impact of developments in the digital sector on financial stability and defining a risk-appropriate level playing field that would prevent international regulatory arbitrage. We therefore support the Financial Stability Board’s work programme in this area.

In addition, the German G20 presidency will initiate expert exchanges to examine how it can be made easier for all population segments to take advantage of digital financial services. A representative survey will be conducted among the G20 members with the aim of obtaining information about how much people know about personal finances and to determine their general financial knowledge, so that targeted training to promote financial literacy can be provided in future.

Fair taxation around the world

The G20 has been working for years towards making international corporate taxation fair and modern. An important component of these efforts is the initiative to combat base erosion and profit shifting (BEPS) by multinational corporations. The G20 has also taken important steps towards greater transparency in the area of taxation and to support revenue administrations in developing countries. The German presidency will push for the rigorous implementation of the agreed standards around the world. In addition, the international tax system must be made more reliable, to allow growth drivers to work as best as they can. Another goal is to carry out a detailed analysis of the impact of digitalisation on companies’ business models and value chains, with the aim of identifying the consequences for taxation.

In the wake of the “Panama Papers” case, further work is needed to improve transparency in taxation, in particular with regard to the provision and international exchange of data on beneficial owners. These data are also relevant to measures by the Financial Action Task Force (see below) to combat money laundering.

Sound international financial architecture

The traditional role of the G20 includes ensuring that the international financial architecture is based on a solid footing and that the global financial safety net is strong enough. These efforts are essential to complement national efforts to enhance resilience. Under the Chinese presidency, the G20 prepared and implemented significant steps at the IMF – a key pillar of the global financial safety net – in the form of doubling quota resources at the start of 2016 and initiating the renewal of comprehensive bilateral credit lines.

The German presidency also plans to take steps to improve debt sustainability. Sustainability principles will be developed, particularly for low-income countries, and conditional financing instruments such as GDP-indexed sovereign bonds will be analysed in more detail. In the area of multilateral development banks, the focus will be on the further optimisation of their balance sheets and on enhancing their role in infrastructure financing through the greater use of private equity.

Resilient and innovative financial markets

Capital markets promote economic growth when they efficiently mobilise capital for investments. During our G20 presidency, we will therefore push for planned reforms that have already been agreed on the international level to be swiftly concluded and for the complete and consistent implementation of existing G20 agreements. If necessary, further regulatory measures may be initiated. The main focus will be on a) the completion of the Basel III regulatory framework for banks’ capital requirements, b) the adoption of recommendations and guidelines for the reorganisation and resolution of central counterparties, c) the adoption of recommendations for tackling vulnerabilities in the asset management sector, d) examining whether existing measures to monitor the shadow banking sector are having an effect and whether additional measures are necessary in order to mitigate the risks associated with shadow banking, and e) the adoption of an analytical framework for the ex-post evaluation of the impact of reforms on the financial markets (“FSB framework for policy evaluation”).

We will continue the ongoing work on green finance by improving international disclosure for financial risks associated with environmental factors. We will also initiate efforts to develop instruments for measuring and controlling these risks. This will create a robust basis to ensure that climate-related and environmental risks are sufficiently taken into consideration when investment decisions are made, which is also important for environmentally friendly financing.

Other topics

A number of other topics will also play a key role during the German G20 presidency.

Remittances sent by migrants to their home countries are very important for many families in developing countries, including in Africa. In the context of the fight against money laundering and terrorist financing, however, it must be ensured that the desired improvement of the infrastructure for remittances is achieved without compromising the standards for combating money laundering and terrorist financing. The FATF and an FSB working group will prepare proposals in this respect in cooperation with the Global Partnership for Financial Inclusion.

The goal of the German presidency is to provide the FATF with the necessary resources and organise it structurally in such a way that it can continue to effectively perform its tasks, which have continued to grow over the years, in the area of combating money laundering and terrorist financing.

Conference on the topic of resilience

A specialist conference entitled “Towards a more resilient global economy” was held in Berlin on 30 November ahead of the launch of the German G20 presidency in the Finance Track. The conference was jointly organised by the Federal Ministry of Finance, the Deutsche Bundesbank and the Centre for European Policy Studies. The deputies of the G20 finance ministers and central bank governors took part in the conference, as did the guest countries and their delegations, representatives from international organisations and around 80 experts mainly from the academic sector, including two Nobel laureates, Robert Shiller (Yale University) and Chris Sims (Princeton University).

Working groups

The participants worked in six groups chaired by respected academics and representatives of international organisations and discussed the following topics:

  • Public debt
  • Private debt
  • The real economy
  • Taxes
  • Capital flows
  • Global financial markets architecture

Representatives of the G20 members worked together with the participating experts to develop possible options for enhancing the resilience of the global economy. The range of possible steps that was discussed was very broad, as can be expected from the very diverse situations in the individual G20 countries.

Conclusions

  1. There was broad agreement within the first expert group that public debt has reached historic levels in many countries, posing significant challenges to the long term sustainability of public finances. As expected, there were animated discussions about the best methods for reducing public debt levels in the medium term. Moreover, in many countries it is also important to limit risks that do not show up directly in public budgets. Participants discussed measures for organising public finances in a more transparent way and for strengthening institutions. Particular emphasis was placed on challenges relating to the preparation of public accounts, the advantages and disadvantages of different fiscal rules and the significance of macroeconomic assumptions when preparing budgets.
  2. Private debt is inevitably linked with credit-financed growth. Excessive private debt makes national economies vulnerable, however, particularly when it leads to rapid rises in asset prices. The participants discussed measures for the regulation and supervision of the financial markets as well as options for reducing the potential disadvantages of equity and debt financing.
  3. In the discussion group on the real economy, there was broad agreement that additional structural reforms are necessary in order to make the economy more flexible. Flexible labour- and product markets should be supported by efficient social security systems in order to absorb the negative impact of shocks on private households. Specific measures to increase the resilience of the real economy that were mentioned included a) increasing competition by reducing barriers to entry into the market and reducing the costs of entering the market, particularly for small and medium sized enterprises, b) active labour market policies (e.g. training options) and c) enhancing both flexibility and security on the labour market (“flexicurity”).
  4. International tax issues are among the G20’s core topics. In this group, there was agreement that the work so far to combat tax evasion and to promote transparency has been very successful and should be continued with the same level of commitment. One key component is supporting developing countries. A lively discussion also developed on the question of how legal certainty in international taxation can be increased, in order to ensure resilience and promote investment and economic growth. In addition, various effects of digitalisation on taxation (direct and indirect taxes) were discussed in detail. This included the issue of the creation of added value in digitalised business models and the role of data as input.
  5. This group addressed the question of how international capital flows should be influenced so that they promote growth and stability instead of triggering crises. According to participants, one possible solution could be a combination of sound macroeconomic foundations, macroprudential regulation and international rules for capital movements that are as uniform as possible. Several delegates and experts put forward the argument that international coordination instruments such as the OECD Code of Liberalisation of Capital Movements and the IMF's “institutional view” could play an important role in promoting growth, stability and resilience against volatile capital movements.
  6. The discussion forum on the global financial market architecture came to the conclusion that strengthening resilience on the national level is a precondition for a more stable global system. On the regional level, regional financial arrangements should be further developed in close cooperation with the IMF. On the global level, all stakeholders should work together to ensure sustainable financing with appropriate incentives and to avoid a “race to the bottom” with regard to the conditionality of the international financial institutions.

    Representatives of each group presented the results of their discussions at a closing forum with all conference participants. These results formed important input for discussions on these issues at the meeting of the deputies of the G20 finance ministers and central bank governors the following day.

Footnotes

Footnotes

1
The G20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the United States, and the European Union.

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