G20 Meeting – Decision Time

What is the G20? The G-20 is made up of the finance ministers and central bank governors of 19 countries and the European Union:

Argentina Australia Brazil Canada China European Union France Germany India Indonesia Italy Japan Mexico Russia Saudi Arabia South Africa Republic of Korea Turkey UK USA.

The outcome of the current G20 meeting in Cannes will be of huge importance as we risk plunging oursleves into another financial crisis. Chris Giles from the FT in London identified 3 challenges that face the world economy and ultimately G20 leaders.

1. Global Growth Forecasts

The IMF has forecasted a reduction in global growth – although emerging economies are still growing rapidly. According to the OECD “Uncertainties regarding the short-term economic outlook have risen dramatically in recent months.” It has cut its growth forecasts for the eurozone from 2% to 0.3% and the US economy from 3.1% to 2%.

2. Eurozone Sovereign Debt Crisis

Fixing this problem is essential for the global economy. According to Chris Giles the crisis has many dimensions:
– the insolvent Greek economy;
– a dip in confidence in the peripheral sovereign debt of Italy and Spain that is increasing their borrowing costs substantially;
– and a weakness and huge losses still growing rapidly in the balance sheets of European banks that are sitting on these assets.

3. Trade Imbalances

According to the IMF, current policies on trade and exchange rates suggest that enormous current account surpluses in China, Japan, Germany and relatively poor oil exporters are set to continue, forcing ever more capital to flow to finance deficits elsewhere which must balance the surpluses.

As Mervyn King, governor of the Bank of England, said recently:
“From the very beginning of the global crisis there has been a reluctance by governments to face up to the underlying solvency problems generated by apparently unending trade deficits with no mechanism – whether flexible exchange rates or some other means – for correcting these disequilibria.”

Hopes for a deal?

One of the main issues here is that there is a need for collective action in order to rectify the problems in the global economy. It seems that countries outside the eurozone will have to sacrifice domestic interests for the common good of all. Tim Geithner (US treasury secretary) and other non-eurozone finance ministers are looking to the IMF to use its financial resources alongside a more European strategy.

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