G-20 leaders are now meeting in Pittsburgh. Here are five key issues that will be up for discussion:
Exit strategies
There has been a series of calls for leaders to coordinate exit strategies from the various government actions taken over the past year in the form of guarantees, bailouts, subsidies, and fiscal and monetary stimulus. Coordination makes a lot of sense: there is clearly the potential for destabilizing financial flows and exchange rate movements as policy adjustments take place around the globe. But there is also plenty of scepticism as to how feasible coordination is in practice.
Financial sector regulation
Leaders are pledged to do what they can to avoid a re-run of the GFC against a backdrop of a Wall Street that to date has seen little regulatory change. The meeting of G20 finance ministers and central bank governors in London earlier this month set out an agenda, with a focus on transparency, bankers' remuneration and bank capital. [fold]
Proposals to regulate bankers' pay and bonuses have grabbed a lot of attention, not least because of the growing sense of a glaring disconnect between the fortunes of the financial sector and the taxpayers who have funded its rescue. But while calls for caps on the absolute level of pay and bonuses might be attractive for punitive reasons, the more likely approach is a general agreement on trying to generate appropriate incentives for risk-taking. The cynical view on these kinds of initiatives, however, is that banks will always manage to find a way around any restrictions on pay, and that anyway, this will have little impact in preventing future crises.
Drawing a bit less public attention, but probably more important in terms of improving the safety of the financial system, is the case for increasing the amount of capital held by banks, with larger capital increases for the bigger banks in particular put forward as an attempt to deal with the 'too big' part of the 'too big to fail' problem. As many observers have pointed out, however, higher capital requirements on their own are no panacea.
Global imbalances
Just as there have been heated arguments regarding what role (if any) global imbalances played in causing the GFC, so there have been strong disagreements over whether they should be part of the discussion in Pittsburgh. Thus while the US and IMF have pressed for a focus on restoring global balance, Beijing and Berlin have taken a very different view. The big divide in opinions here means that any discussion at Pittsburgh is likely to be restricted to platitudes.
Reform of the international financial architecture
As the G20 finance ministers and central bank governors affirmed in London, there is general agreement regarding reform of international financial institutions, and in particular, that 'the voice and representation of emerging and developing economies, including the poorest, must be significantly increased to reflect changes in the world economy.' Last week it appeared that the contours of a deal were in place, but with the Europeans always expected to be the big losers from any major shift, and with Washington keen to offer up IMF reform as a quid pro quo for progress on the issue of global imbalances, it now looks like there are still major obstacles to reaching an agreement.
Staving off protectionism
While there has been no mass retreat into protectionism, G-20 leaders have nevertheless failed to live up to their promises regarding open markets, and have similarly failed to re-ignite the Doha Round, with Washington reportedly still reluctant to move ahead. One useful thing leaders could do at Pittsburgh, however, would be to take the advice of a recent Lowy Policy Brief and establish domestic transparency arrangements, since defeating protectionism begins at home.
Photo by flickr user DMcGrew, used under a Creative Commons license.