It is axiomatic that global growth depends largely on the powerful association of nations represented by G-20. The group contributes 85 per cent to the global economy and its collective performance is crucial for the overall growth. A 2.0 per cent target has been set for the GDP of these countries which the group claim would add $2.0 trillion to global growth by 2018. The finance ministers, who met recently in the Australian city of Cairns, were confident that they were tantalisingly close to the shot in the arm of global economy that would add $2.0 trillion and create million of jobs, make substantial progress in fire proofing the world's financial system and close tax loopholes exploited by giant multi-nationals.
The finance ministers expressed their determination to give a major push to growth and said they were willing to use all macro-economic levers, including monetary, fiscal and structural policies, to meet the goal. Almost one thousand measures were proposed that would boost global growth by 1.8 per cent within 2018, close to the 2.0 per cent goal set in February this year. The proposals to lift global growth will now go for formal approval at the summit of G-20 leaders in November. Chief among these proposals was a global initiative aimed at increasing private investment in infrastructures, an issue of top priority for the Australians who head G-20 this time.
The risk that loose monetary policy would inflate assets bubbles was discussed in details in the meeting of the finance ministers. The need for the US Federal Reserve to avoid spooking markets as it winds down quantitative easing (QE) programme also came for discussion. The Fed is widely expected to terminate the asset buying programme in October 2014 and to start raising interest rates next year. This is in sharp contrast to the European Central Bank and the Bank of Japan which are contemplating even more easing.
The emerging economies within the G-20 are not happy at the closure of QE that stimulated their economies with inflow of capital, particularly from America. But Asian policy makers are now much better prepared to manage the onset of higher US interest rates, making a repeat of last year's 'taper scare' far less a possibility to rock emerging markets. There is less of a surprise element this time around over QE tapering. On the other hand, regulators are looking at increasing the size of the capital buffer that the world's top banks need to hold to reduce the risk of a repeat of 2008 global financial crisis.
In the G-20 finance ministers meeting building a buffer of about 16 per cent of risk-weighted assets were considered realistic but no final decision was taken. A figure might be announced for this at the leaders' summit next November.
Also in the agenda of the finance ministers' meeting were plans to stem the loss of revenue from multinationals shifting their profits to low-tax countries, potentially reclaiming billions of dollars. Taxation arrangements of global companies have become a hot political topic following media and parliamentary investigations into how companies reduce their tax bills.
A common concern expressed in the finance ministers' meeting was the risk of Europe's economic troubles pulling global growth down. Differences of opinion surfaced between European and other members of G-20 over the need for near-term stimulus. A group of ministers felt that if the efforts to boost demand were deferred for too long, there is a risk that headwinds against growth will get stronger. That argument did not find favour with others, particularly the Germans who emphasised the need for structural reforms and strict budget controls. The pressure exerted by European Union on international partners came in the midst of a debate within the Eurozone itself over the best way to boost growth. France and Italy are pushing for fiscal stimulus while Germany is an advocate of budgetary restraint.
The US has been a persistent critic of Europe's response to the financial crisis, arguing that countries like Germany with its budget surplus should invest more and cut taxes to boost growth. It has expressed concern that private sector credit disbursement in the Eurozone has gone down in recent months.
Apart from concern about the risk of deflation in Europe, weakening growth in China and a potential stalling in Japan's economic stimulus after a rise in consumption taxes hovered over the finance ministers' gathering in Cairns, Australia.
If news on investment and demand stimulus measures in EU do not make the heart leap in joy, the developments in Asia are positive from the point of view of global growth. The Asian Development Bank has maintained its annual growth forecast for the region at 6.2 per cent. The slowing down of China's economy has, however, put a brake to feeling euphoric about the regions' growth prospects. India and Indonesia have, however, been lifted by hopes that their new governments will press ahead with much needed structural reforms.
The developing countries are not big players in the game of global growth. But their economies are on track registering slow but steady contribution to global growth. At least they deserve the credit for not dragging the global economy down.
Taking a comprehensive look at the global economy the conclusion becomes ineluctable that upward movement in growth rests on Europe at this point of time. If the European Union countries can resolve their differences of opinion over stimulus and austerity the global economy is going to get a powerful shot in the arm. The G-20 can play a crucial role in creating a consensus between the rival camps.
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