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G20 Summit Agrees to Maintain Stimulus Policies

Posted September. 28, 2009 08:26,   


The Group of 20 summit in Pittsburgh has agreed to maintain government stimulus policies until the global economy is on a solid recovery path and then implement coordinated exit strategies.

As the summit ended Friday, however, world leaders failed to make progress on measures to prevent climate change and disagreed over raising more capital for banks.

Disagreement also arose over bonuses paid to employees at financial companies, though the leaders accepted the U.S. opinion to tie executive pay to performance. They stopped short of presenting concrete standards due to the European Union’s push to cap bonuses.

○ Soundness of banks’ capital

Expectations were high that world leaders could collectively respond to climate change since the G20 event came on the heels of the U.N. Climate Change Summit in New York. They reached no specific agreement on the matter, however.

Disagreements between developing and developed economies linger over how much developed countries should pay for developing countries’ efforts to reduce greenhouse gas emissions. Worse, nothing was agreed on a draft pact to replace the Kyoto Protocol for the December summit on climate change in Copenhagen.

The G20 summit statement urged participating countries to scrap fossil fuel subsidies but had no concrete timetable to that end due to conflicting interests. Russia, the world’s largest provider of such subsidies, was reportedly pessimistic about their elimination.

The EU, which has long sought collective action on climate change, was the most disappointed over the G20 summit results. European Commission President José Manuel Barroso said in a statement that he cannot hide his disappointment at the slow progress on climate change, urging countries to take serious action.

On boosting the capital soundness of banks, the leaders failed to agree on when and how much capital to raise. They just agreed to devise standards for capital regulations on banks and implement them in 2012.

Banks in European countries such as France and Germany fear to lose ground in the global financial market if rigorous standards on capital soundness are implemented.

On executive pay, G20 leaders endorsed the U.S. proposal to tie compensation to long-term performance to prevent excessive pay at financial companies. They failed to present, however, specific standards due to the EU proposal for pay caps.

○ International cooperation bear fruit in recovery

Nevertheless, the G20 summit produced success on the economic front by agreeing to keep government stimulus activities going until economies recover and cooperate in implementing exit strategies.

Crediting the recovery of the global economy to international coordination efforts, the leaders agreed to continue stimulus measures in judging that an exit strategy is premature. They also decided to coordinate the time and methods when implementing such strategies.

To eliminate imbalances in the global economy, the leaders also agreed to monitor each country’s economic policies on domestic consumption and exports.

The New York Times said such an agreement has no binding power, but participating countries will feel burdened when they devise policies since the International Monetary Fund and other participating countries will assess each other’s policies every six months.

The leaders also agreed to hold the summit on a regular basis to replace the Group of Seven summit, under the understanding that the importance and standing of emerging economies have significantly grown.

Fred Bergsten, director of the Peterson Institute for International Economics, said that at a time when emerging and developing nations account for more than half of the world economy, the G7 or G8 summit is irrelevant and that holding G20 summits regularly is inevitable.