Germany has assumed the G20 Presidency on 1 December 2016. This gives us the opportunity to participate in the agenda-setting of this most important forum of international cooperation in the field of economic policy.
In the finance track, which includes Finance Ministers and Central Bank Governors, G20 members agreed to focus on three priorities proposed by the German Presidency: enhancing resilience, supporting investment, particularly in Africa, and shaping digitalisation. Let me explain why we think that enhancing the resilience of G20 economies must be at the core of the G20 finance agenda.
The effects of the most recent financial crisis are still vivid memories. Almost ten years after the beginning of the global financial crisis, we are still dealing with its aftermath. The G20 has committed to cooperate closely and to take measures to prevent future crises or at least lessen their impact on economies and societies. This was the motivation of the G20’s comprehensive financial regulation agenda that is moving fast towards completion and where the focus has shifted to implementation and monitoring. But safer financial markets are only one element of a more resilient global economy. There are a number of other issues we need to deal with to make our economies more resilient to withstand external shocks as well as internal challenges:
- We need more diversified economies with flexible product and labour markets to facilitate adjustment and boost growth. We must address the structural problems that hold back growth today and set the foundations for stronger and more sustainable growth going forward.
- We need to ensure that public and private debt is on a sustainable path and reduce reliance on a growth model fuelled by credit-financed private and public consumption growth. Public and private debt has risen to historical highs: The most recent IMF Fiscal Monitor finds that global debt outside the financial sector has reached 225 percent of global GDP or 152 trillion USD. Private debt accounts for about two thirds of this amount.
- We need to rebalance our economic policy mix. Monetary policy is ultra-loose in many regions of the world. By now, it is very clear that this policy has serious side-effects, and we risk stoking financial instability and the next crisis. But should this crisis really occur, we will have no room for manoeuver, neither in fiscal policy given high debt, nor in monetary policy with interest rates already at the zero bound.
Economic resilience is not a new issue for the G20, but we want to approach it in a more comprehensive way. Under the German Presidency, we are aiming for a list of resilience principles agreed among G20 members. They are envisaged to be formulated along four broad dimensions that are critical to rebuild or create strong buffers and to make G20 economies more resilient to withstand external as well as internal challenges: i) public debt, which includes enhancing debt sustainability and fiscal transparency and improving the quality and composition of public finances; ii) private debt, which includes designing effective debt resolution mechanisms to assist with deleveraging, cleaning up of private sector balance sheets in order to resolve legacy problems, lowering negative feedback loops between banks and sovereigns, addressing debt bias in tax and expenditure policies and reducing over-reliance on a growth model fuelled by credit-financed growth; iii) real economy, which includes fostering the diversification of economies, promoting flexible product and labour markets to facilitate adjustment to shocks, and improving growth opportunities for small and medium enterprises (SMEs) and start-ups; and iv) external sector, which includes bolstering the shock absorption capacity against volatile capital flows and robust global financial safety nets.
The high-level principles are aimed at guiding members to develop country specific resilience actions which the German Presidency proposes as part of the 2017 update of the national G20 Growth Strategies. Strong domestic policy action, tailored to specific needs and circumstances of individual countries, can enhance each country’s resilience as well as the resilience of the global economy as a whole.
Enhancing resilience also hinges on whether the benefits of growth reach vulnerable segments of society. The summit in Hangzhou rightly stressed the need to intensify our work to make growth more inclusive. We need to make sure that the benefits of globalisation are widely shared and well understood by everyone. We also have to ensure equal opportunities in all societies. And, of course, the trend of rising income inequality needs to be monitored closely, and counter-measures must be taken where appropriate.
As a prelude to the German Presidency, on November 30th, we convened G20 Finance and Central Bank Deputies, representatives of International Organisations and world-renowned academics to discuss the many facets of economic and financial resilience. The discussions during the conference ensured that further work on this issue during the German presidency is underpinned by solid expert advice and have already enriched the discussion on the issue of resilience among Deputies at their meeting on December 1st. The work will now go on at the working level to provide specific input for the meeting of G20 Finance Ministers and Central Bank Governors in March in Baden-Baden and beyond. When it comes to resilience, the German presidency is in for the long haul.