G20 finance communique: Long on reassurance, light on policy

G20 Finance Ministers and Central Bank Governors released their third communique of 2015 over the weekend. Their rhetoric is notable for the calm statement of positive reassurance on the macroeconomic environment, although the direct policy commitments appear to be light on.

In the communique, Ministers and Governors recognised the significant challenges from ongoing economic developments and recent financial market volatility, but balanced these with a degree of level-headed sense and some refreshing optimism. They expressed confidence in their capacity to take decisive action that keeps the economic recovery on track.

Some major global economic risks were explicitly addressed. Policymakers have resisted any knee-jerk reactions to recent financial market volatility, and will continue to monitor emerging financial sector risks. They have also responded clearly to recent developments, such as the surprise moves by the People’s Bank of China to devalue the yuan, and the ongoing guessing game over future monetary policy decisions by the US Federal Reserve. Ministers and Governors have sought to assure markets that they will carefully calibrate and clearly communicate actions in a way that minimises negative spillovers and uncertainty, and promotes transparency.

This kind of statement is not new, nor reflective of a change in behaviour, although is a timely reminder that those with influence on the important economic levers plan a path of coordinated, common-sense policymaking. Ministers and Governors recognised the need to move towards more market-determined exchange rate systems and exchange rate flexibility.

They have also reiterated the limits of monetary policy stimulus on its own in leading to balanced growth. The focus of the narrative has remained on collective actions that boost investment and lead to structural reform. In Turkey’s G20 host year, this has centred on ongoing monitoring of structural reform commitments through the G20’s growth strategies, and boosting investment through investment strategies. Christine Lagarde advocated during the meetings for a greater sense urgency in implementation, saying:

Most things are just too low. Growth is too low, productivity is too low, trade numbers are too low, investment is too low, infrastructure projects are too few and the only thing that is too high is unemployment.

However, the G20 has not adopted this sense of urgency in its policy actions. Instead, the hard truths on the implementation of growth strategies will be included in an accountability report to be delivered to leaders in November. It appears that finalisation of investment strategies has been delayed pending further ‘qualitative and quantitative assessments’.

This passiveness on policy commitments is consistent throughout the communique. Ahead of the FSB Plenary meeting at the end of this month, financial regulation appears to focus more on time frames than the delivery of new advances. Ministers and Governors reaffirmed that they would finalise the remaining core elements of the global reform agenda by the end of the year: they flagged actions on total-loss-absorbing capacity for too-big-too-fail banks, shadow banking and over-the-counter derivatives markets. Additional points have been rehashed on the ongoing monitoring of financial sector risks, the impending delivery of the FSB’s first annual report on the implementation and effects of all financial sector reforms.

It is a similar story on tax, development and climate change. October has been set as the date for delivery of the final package of all 15 action items that constitute the OECD/G20 Base Erosion and Profit Shifting (BEPS) Action Plan, and presumably an outline of next steps. In addition, Ministers and Governors welcomed the outcomes of the Addis Ababa Conference on Financing for Development, and supported efforts on sustainable development goals and on climate change ahead of UN meetings later this year.

As always, the section on ‘Issues for Further Action’ provides a couple of interesting tidbits for wonks, looking to the G20’s future focus during the 2016 Chinese G20 Presidency. Two points stand out here, both concerning the international financial architecture:

• With IMF reform remaining stalled, Ministers and Governors have called for an assessment of the global financial safety net architecture by early 2016.
• The G20 continues to advance market-based solutions to strengthen the contracts around sovereign debt restructuring: this is the more politically pragmatic alternative to the conceptually appealing sovereign debt restructuring mechanism.

The communique sends a useful, calm signal about the macroeconomy. But starting with the next Ministers and Governors’ meeting in Lima in October, the G20 now needs to demonstrate that it is actually taking the decisive policy actions needed to keep the economic recovery on track.