OTTAWA — G20 finance ministers need to ditch discussions of a global bank tax, and focus instead on clearly explaining how they will regulate banks and fix their economies, Canadian officials say.
Finance Minister Jim Flaherty is on his way to a high-stakes meeting in Korea for final negotiations leading to the Toronto G20 summit at the end of June.
On his way to meet central bankers and finance ministers in Busan, Korea, he’ll talk with his counterpart and top financial regulators in China — a key player in the G20.
Flaherty is co-hosting the G20 meeting in Korea, and on Monday a senior official laid out Canada’s expectations.
He said the time has come for G20 countries to elaborate on exactly how each plans to wind down stimulus efforts, get deficits under control and contribute to sustainable global growth.
And as indebted developed countries explain how they plan to recover, prosperous emerging countries need to show some willingness to fill the gap in global demand, the official said on condition of anonymity.
He did not mention China specifically, but Canada has made no secret that it wants China to allow its currency to be more flexible while encouraging its citizens to spend.
Co-operation among the G20 is crucial now that the European economy has slowed once again, said Wendy Dobson, co-director of the Institute of International Business at the University of Toronto.
“Europe’s problems are hurting global growth numbers,” she said.
“That has probably helped to stiffen the global spine” and increases the prospects for countries taking action to clean up their finances, she said.
The International Monetary Fund has told G20 countries that in order to put the world on a sustainable path, they need to make major reforms.
Rich countries carrying large debts need to tighten their belts, cut spending on health, trim age-related costs, raise taxes and carry surpluses for a decade in order to restore fiscal health.
And emerging markets carrying large surpluses need to allow flexible exchange rates, bolster social spending and encourage their populations to spend all their savings.
But it’s unclear how far the G20 finance ministers in Korea will go toward endorsing such a blueprint for recovery, Dobson said. While they can agree in principle, promises to take concrete action will be more difficult to achieve.
Similarly, the G20 finance ministers will likely find a way to agree, again in principle, to strengthen their banking regulations and oversight.
But disagreement on whether a global bank tax or levy should be part of that package threatens to undermine progress, Dobson said.
“The chances are good on agreement to broad principles, now that the United States has hammered out its own reforms,” Dobson said.
“The danger is that agreement will be pre-empted by disagreement by leaders on bank levies.”
The European Union and the IMF want to see countries tax their banks to create a pool of money that could be used for bank bail-outs, so that taxpayers won’t have to foot the bill. But Canada and many of its G20 allies have argued successfully that there are far better ways to make sure taxpayers don’t have to bail out banks.
Specifically, Canada argues that good solid rules for banks on liquidity, leverage and risk should help considerably, provided the rules are enforced.
Some countries fear the G20 financial reform package is not moving quickly enough to deal with fragile banking systems, especially as markets have the jitters in the wake of Europe’s sovereign debt problems.
Japan, for example, is urging quick and concrete action on banking rules.
And in a recent interview, former Canadian prime minister Paul Martin said the single most important thing the G20 should be doing to avoid another crisis is to act quickly on effective financial regulation.
“There’s been too much discussion and not enough action,” Martin said.
The senior official said Canada wants to see the G20 countries agree to “core” measures that would tighten capital requirements for banks, better regulate trading in derivatives, and increase oversight and enforcement of the rules.
And it wants countries to implement these measures by the end of the year.
As well, Canada is pushing for the completion of a package of reforms to the financial system by year’s end that does not include a bank tax.
The official said there are many countries in the G20 that support Canada on this issue, adding there is growing interest in Canada’s idea for a rainy-day fund called contingent capital that banks would retain on their books.