Introduction

Germany officially took over the G20 presidency from China on 1 December 2016. The first meeting of G20 finance ministers and central bank governors under the German presidency was held in Baden-Baden on 17–18 February 2017. The ministers and governors discussed the German presidency’s three key priorities, which are:

  1. Improving the global economy’s resilience,
  2. Launching the Compact with Africa initiative and
  3. Addressing digitalisation in the financial sector.

In-depth discussions were also held on the international financial architecture, international tax policy and various topics relating to financial market regulation.

Boosting economic resilience

The G20 finance ministers and central bank governors agreed that the global economy, although recovering, is still weaker than hoped for and remains vulnerable to certain risks. Furthermore, they made a clear commitment to international cooperation in the area of economic and fiscal policy. The finance ministers and central bank governors agreed on principles to improve the resilience of G20 economies. The resilience principles are intended to help the G20 members to develop measures at the national level to make their economies more resilient. The main focus is on the real economy, the private financial sector, public finances, monetary policy, and international trade. Important elements of the principles include structural reforms to improve the reallocation of factors of production, for example by creating flexible labour and production markets, implementing measures to ensure sustainable, transparent public finances and improving risk analysis of public finances. As for the private sector, the principles focus on measures to prevent excessive debt, reduce vulnerabilities in the financial sector and ensure efficient bankruptcy provisions. Where monetary policy is concerned, the principles stress the importance of independent central banks. Regarding international trade, the principles address issues such as the need to harness the benefits of international capital movements while also ensuring that risks are monitored more effectively. The principles also emphasise the need to intensify international trade and investment. Furthermore, the finance ministers and central bank governors consulted on ways of making growth more inclusive and developing cooperation on trade policy in the future, a discussion which is to be continued at the upcoming G20 meetings ahead of the Hamburg summit.

Investment partnership with Africa

The German presidency’s initiative to set up a Compact with Africa received broad support. The G20 countries acknowledged their special responsibility to join forces in tackling the challenges facing the poorest countries, especially in Africa. The Compact with Africa initiative aims to boost private investment and investment in infrastructure in Africa. Such investment is an essential precondition for strong, balanced and sustainable growth. However, achieving higher investment – particularly from foreign investors – requires improved investment conditions. To this end, the World Bank, the International Monetary Fund (IMF) and the African Development Bank have produced a joint report that was warmly received by the G20 finance ministers and central bank governors at the Baden-Baden meeting. This report proposes a catalogue of instruments and measures designed to improve macroeconomic, business and financing frameworks as a way to boost private-sector investment.

To improve the specific framework conditions, individualised investment compacts will be set up between interested African countries, international organisations and partner countries. The various partners will commit to specific steps outlined in a catalogue of measures. The G20 will provide political support for comprehensive, country-specific packages of measures and will give African countries a platform to showcase investment opportunities and highlight the attractiveness of their countries for foreign investment.

So far, the initiative has sparked great interest among many African countries, as evidenced by the letters addressed to German Finance Minister Wolfgang Schäuble by Ivory Coast, Morocco, Rwanda, Senegal, and Tunisia, whose governments were invited in turn to send delegations to the G20 meeting in Baden-Baden. There they submitted clear declarations of intent which will now be used as a basis for setting up investment compacts. In addition, Berlin will be hosting a major conference on Africa on 12–13 June 2017, where the investment compacts will be presented.

The five countries listed above are only the first-round participants. The Compact with Africa is to be included as a key topic in the G20 Finance Track and is open to all African countries that are interested in improving their frameworks for private investment on a lasting basis.

Shaping digitalisation

The G20 finance ministers and central bank governors welcomed the opportunities opened up by modern digital financial solutions (fintech). However, any further development in the use of digital technologies in the financial markets must be monitored closely. Any risks that could potentially arise from digitalisation should be addressed by targeted regulatory measures as appropriate. For this reason, the Financial Stability Board (FSB) will be carrying out a stock-take of existing regulatory approaches with regard to the fintech sector.

The G20 finance ministers and central bank governors made it clear that cyber-attacks – the malicious use of information and communication technologies – are a potential threat to the stability of the financial markets. For this reason, they pledged to help financial institutions increase their capacities to protect themselves against such attacks. The FSB was tasked with a stock-take of existing regulatory approaches and supervisory practices on fintech within the G20, with the aim of intensifying international collaboration in this area.

The use of digital technologies is also very important for advancing financial inclusion. The finance ministers and central bank governors expressed their support for the Global Partnership for Financial Inclusion (GPFI); in particular, they stressed the importance of financial literacy and consumer protection in the digital age. In addition, they saluted the GPFI’s contribution to advancing the financial inclusion of vulnerable sections of the population and to improving SME access to financing.

The international financial architecture

The G20 finance ministers and central bank governors reiterated their commitment to further strengthening the international financial architecture and the global financial safety net. The IMF plays a key role here.

Ministers and governors applauded the IMF’s guidelines for sustainable public finances with the aim of improving debt sustainability, especially for countries afflicted by poverty and extreme poverty. Both lending and borrowing countries are called on to adhere to the guidelines, which were developed in consultation with public borrowers (mainly low-income countries).

The G20 representatives at Baden-Baden also discussed how developing and deploying innovative financing instruments, in particular GDP-linked bonds, could help improve the sustainability of public finances. The Compass for GDP-Linked Bonds, which was developed jointly by the G20 countries, provides an overview of the key advantages and challenges of such instruments and what form they could potentially take.

In light of scarce public resources, high demand for investments in infrastructure and the vital role of the private sector in driving sustainable economic development, the G20 finance ministers and central bank governors welcomed various initiatives presented by the multilateral development banks. In an effort to boost private-sector participation in infrastructure investments, the development banks will be finalising principles for the effective use of private funding in time for the G20 summit in Hamburg; they will also be formulating their own goals for increasing the proportion of private funding. Two further initiatives which were launched during the Chinese G20 presidency last year aim at a) using public funds held by multilateral development banks more effectively and b) supporting infrastructure financing by those banks. The development banks are expected to submit progress reports on these initiatives in time for the Hamburg summit in July.

Participants at the meeting also discussed how balance of payments crises could be overcome more effectively. Because several international organisations are involved simultaneously in countries in need of assistance, it is essential that the institutions involved pursue a coherent approach. The G20 has elaborated coordination principles to help achieve this goal.

Another topic of discussion at Baden-Baden was the further liberalisation of international capital movements. Liberalising capital movements offers major advantages, such as supporting foreign investments which encourage growth and employment in the target country. However, this liberalisation also harbours certain risks, especially since these capital flows are highly volatile. Responding to this issue, the German G20 presidency proposed that all G20 countries adhere to the OECD Code of Liberalisation of Capital Movements. At the Baden-Baden meeting, some G20 member countries which are not OECD members expressed interest in adhering to this code. The other countries were all invited to participate in the ongoing revision of the Code. This discussion underlined the G20’s commitment to globalisation and provided useful input for the improvement of the regulatory framework for international capital flows.

International financial architecture

The term describes the entirety of the institutions and agreements that regulate and stabilise international financial and monetary relations. The institutions involved notably include the IMF, regional financing institutions (e.g. the European Stability Mechanism), the World Bank and other multilateral development banks, the Bank for International Settlements, the FSB, the Paris Club, the Financial Action Task Force (FATF) and the OECD, insofar as it deals with specific financial questions. Over the past few years, strengthening the international financial architecture has been a priority for the G20, which has initiated a large number of reforms addressing this issue.

International tax policy

The finance ministers and central bank governors reaffirmed the G20’s commitment to supporting a fair and modern international tax system. Their commitment includes implementing the Action Plan on Base Erosion and Profit Shifting (BEPS) by international corporations, as well as introducing the international automatic exchange of financial account information, which will be coming into effect in September 2017. For both these initiatives, it is essential that the specific concerns of developing countries be taken into account. The multilateral instrument allowing for hundreds of double taxation agreements worldwide to be adjusted to certain BEPS recommendations will play an important role in implementing the BEPS project. Germany and many other countries will be participating in the first signing ceremony for the multilateral instrument in Paris on 7 June 2017.

In addition, the finance ministers and central bank governments reiterated their determination to move forward with the transparency initiative decided upon nearly a year ago in response to the Panama Papers revelations. This initiative enables the various national tax administrations to access and share information and thus to identify the beneficial owners of so-called letterbox companies.

As a new priority for the G20’s tax policy agenda, the finance ministers and central bank governors launched an initiative to improve tax certainty for international corporate taxation. The ministers and governors affirmed their support for the measures to improve tax that were outlined in a report issued by the IMF and the OECD.

The measures aim to improve the investment conditions in individual countries by encouraging more reliable legislation on the one hand and, on the other, more efficient application of the law by national tax administrations, including effective mechanisms to resolve tax disputes. In order to ensure that emerging and developing countries will be able to benefit from this initiative, the German presidency is planning a technical assistance workshop in collaboration with the IMF and the OECD. The workshop is set to take place in autumn 2017 in Africa and will be designed to reduce the legal uncertainties specific to developing countries.

At the suggestion of German Finance Minister Wolfgang Schäuble, the G20 finance ministers and central bank governors engaged in a broad discussion of the effects of digital technology on taxation. This was the first discussion of the issue to take place at the G20 level. The OECD has been tasked with carrying out further analysis of this complex issue and will be reporting back to the G20 on its findings next year.

Enhanced tax certainty

The measures recommended by the G20 finance ministers and central bank governors to enhance international tax certainty cover the following areas:

More effective legislation by legislative bodies:

  • Focus on maximum transparency for legislative procedures
  • Avoid excessive retroactive effects from new legislation
  • Appropriate consultation procedure and sufficient explanations for new legislative initiatives

More efficient law enforcement by tax administrations:

  • More predictable and consistent taxation thanks to timely tax assessment notices and technical information regarding the application of new laws and rulings
  • Closer international cooperation thanks to more effective prevention and/or more effective arbitration for disputes
  • Taxation agreements adjusted to the BEPS measures with the help of the multilateral instrument
  • Simplified, more efficient rules for the reimbursement of withholding tax.

Developing and regulating financial markets

The G20 members continue to pull in the same direction on the issue of financial market regulation. The ministers and central bank governors reaffirmed their determination to consistently implement the agreed measures and to move forward with the reform agenda.

  • They approved recommendations for regulation to avoid structural risks in connection with asset management activities;
  • They agreed to continue to closely monitor emerging risks and weaknesses in the financial system, including risks connected to the shadow banking sector, and to review the effectiveness of measures taken so far;
  • They agreed that the G20 would continue to energetically push forward with its ongoing work to finalise the supervisory framework for banks operating internationally (Basel III) and to draw up recommendations for improved resilience and better recovery and resolution options for central counterparties;
  • The approved reforms on over-the-counter derivatives will be implemented soon, to the extent that they are not already in force;
  • There was broad support among participants for the work on creating an analytical framework to evaluate the financial market reforms undertaken thus far. The aim is not to weaken these reforms, but rather to ensure that the regulatory measures help achieve the goals set by the G20.

The G20 finance ministers and central bank governors agreed that Green Finance is an important issue and that they support its further development. More detailed data and improved methods of analysis would promote better understanding of how climate change affects financial risks. The work being carried out by the FSB-coordinated Task Force on Climate-related Financial Disclosures and the G20 Green Finance Study Group is a step towards this goal. The issue will be discussed at the next meeting of the finance ministers and central bank governors, which will be taking place in April in Washington, D.C.

Shadow banking

According to the FSB definition, shadow banks are entities and activities which operate on the financial markets fulfilling bank-like functions, in particular lending, but which are not actually banks and are therefore not subject to the same regulations as credit institutions.

Global governance

Remittances

Remittances are money transfers by individuals living abroad to friends and relatives in their home countries. They make an important contribution to economic development in the receiving country, where they can be used not only for private consumption, but also for investments, particularly in SMEs. Remittances to developing countries are equivalent to approximately three times the amount of official development assistance that these countries receive.

For this reason, it is important to uphold secure access to reasonably-priced money transfers while also complying with the regulatory requirements to combat money laundering and the financing of terrorism. The FSB report and the FATF guidelines on correspondent banking relationships have made an important contribution towards ensuring an inclusive and sound remittance framework. Correspondent banking relationships enable banks to deal with financial institutions in different jurisdictions so that they can provide cross-border payment services to support foreign business. Both papers were warmly received by the G20 finance ministers and central bank governors, as were the joint efforts to further facilitate access to banking services being made by the FSB, the FATF and the GPFI in consultation with banks and remittance service providers. The ministers and governors asked for a report on this issue to be drawn up for the heads of state and government meeting at the G20 summit in Hamburg. Participants at the Baden-Baden meeting also appealed to international organisations to provide more technical support in capacity building so as to improve the framework for sending remittances.

Strengthening the Financial Action Task Force – combating terrorism financing and money laundering

The G20 countries are also in agreement on combating the financing of terrorism and money laundering as well as their determination to strengthen the anti-money-laundering organisation FATF. The participants stressed the growing importance of the FATF and expressed their support for the FATF’s internal reform process. Simultaneously, they called for the FATF to be given the necessary resources as well as to be organised in such a way that it can remain effective in its function in combating money laundering and terrorism financing, two tasks which have grown continuously in scope over the years.

Phasing out fossil fuel subsidies

The G20 finance ministers and central bank governors reaffirmed their determination to phase out inefficient fossil fuel subsidies in the medium term, while also taking into account the need to support poorer sections of the population. Furthermore, they encouraged all G20 countries to introduce a peer review mechanism for inefficient fossil fuel subsidies.

Promoting data sharing

The ministers and central bank governors expressed support for a supra-institutional initiative to share data and the creation of a public database located at the IMF on macroprudential instruments, which both aim to increase the resilience of the financial system as a whole.