Tomorrow’s Sydney G20 meeting is shaping up as a conflicted affair. Overnight, in a clear warning to the meeting, the IMF declared that emerging markets (EM) will derail the recovery if tapering proceeds. From Bloomie:
Risks of prolonged market turmoil inemerging markets and of deflation in the euro area are threatening the world’s improved economic prospects, according to the International Monetary Fund staff.
In a note prepared for central bankers and finance ministers from the Group of 20, the IMF said the recovery is still weak and “significant downside risks remain.” A January global growth forecast of 3.7 percent for this year, from 3 percent in 2013, hinges on recent market volatility from Turkey toBrazil being short lived, staff wrote.
“Capital outflows, higher interest rates, and sharp currency depreciation in emerging economies remain a key concern,” according to the report prepared ahead of the G-20 Feb. 22-23 meeting in Sydney. “A new risk stems from very low inflation in the euro area, where long-term inflation expectations might drift down, raising deflation risks in the event of a serious adverse shock to activity.”
This is aimed at a united German and US agenda which tells EMs to suck it up. From the WSJ:
Emerging markets should stop blaming U.S. monetary policy for capital flight and focus on domestic reforms instead, a German finance ministry official said ahead of a meeting of Group of 20 financial officials where tensions between the U.S. and emerging markets are expected to run high.
The comments, outlining Germany’s position ahead of the G-20 meeting, suggest India, Brazil, Turkey and other emerging markets could face a powerful front this week as they continue to blame the Federal Reserve’s policy of scaling back its bond-buying program for sucking capital from their economies.
Germany and the U.S. have often clashed in global economic policy debates in recent years, with Washington criticizing Berlin for not supporting its internal demand enough while Berlin fired back at American loose fiscal and monetary policy.
With the Federal Reserve tapering and Congress making progress in tackling the country’s long-term debt challenge, Berlin’s position in the G-20 is becoming aligned with Washington’s.
Struggling emerging economies are expected to ask for help in Sydney, Australia, where the Group of 20 finance ministers and central bankers meet on Feb. 22-23. Yet instead of facing a divided developed world, as emerging economies have at such global meetings in the past, German officials said they would hear a consistent message from Europe and the U.S.
“We believe that the normalization is necessary,” said a senior German finance ministry official at a briefing on the meeting. “We will argue that one mustn’t discourage this normalization and mustn’t meddle with independent central banks.”
Australia is not so hard-nosed but Joe Hockey is sending mixed signals. While aiming to support EMs he’s also trying to hose down European moves to impose Tobin taxes, which would prevent the kind of hot money flows that are threatening to blow up EMs. From The Australian:
JOE Hockey is countering attempts to impose new constraints on Australian banks at an international summit this weekend, amid fears the new rules could drive up costs and stifle lending.
…Mr Hockey told The Australian it would be a “major error” to attempt to regulate banking to outlaw risk and declared he would be comfortable if some of the new proposals drifted “into the ether” to be forgotten.
The stance is at odds with a long-standing push from European ministers and regulators for imposts such as a tax on financial transactions and tighter market integrity rules in the wake of the global financial crisis.
It is indeed regulating away risk to impose Tobin taxes. The kind of risk presented by rampant speculators with no interest in underlying economies or genuine commerce. But Australia’s major banks and their housing collateral must come first. I love to see Australian politico-housing complex strutting the world stage.
Mr Hockey makes better theoretical (but not practical) sense in his pursuit of the vainglorious global “hard growth target”:
Amid criticism from Germany over a key part of his agenda, Mr Hockey will make a major speech in Sydney today to step up his case for an ambitious growth target to be endorsed by G20 finance ministers at the summit this weekend.
The speech to government leaders and finance executives will link the global reforms to the Coalition’s domestic agenda to spur infrastructure investment and lift growth.
Fiscal spending and reform to boost private investment, yes, a good idea for an infrastructure starved and private sector mired deleveraging West, and to keep global growth up while monetary normailsation transpires. But a hard growth target for the entire world is ambitious, to say the least. As Germany says:
“This is a somewhat outdated form of economic planning,” said the official. “We are extremely skeptical about it.”
Not to mention the practicalities. As has been happening ever since the GFC, the international bodies that did so well during the crisis have reverted to national interests and clusters where interests align. Hopes are low and rightly so.
