G20 summit should adopt sound mechanisms to push for financial stability and better coordination among key powers

Amid economic instability in Europe and a fluctuating euro fuelled by the sovereign debt crisis in Greece and other European countries, the G20 summit, due to be held in Toronto, Canada at the end of this month, is entrusted with the overwhelming task of enhancing policy coordination among major world powers and promoting stable recovery of the global economy.

At a meeting of G20 finance ministers in Washington in April, participants agreed that the world economy had achieved unexpected recovery.

However, such optimism was soon dampened by the Greek debt crisis, which spread along the Mediterranean and to some Central and East European nations, causing the euro to be devalued and global stock markets to plummet.

In addition to the chain reactions it has sparked across emerging markets, chaos in Europe has also disrupted the pace of global economic recovery and blurred its prospects.

That also explains why the Pusan meeting of G20 finance ministers and chiefs of central banks, convened early in June, gave top priority to coordinating economic recovery between developed and developing countries, along with efforts to reconstruct global financial institutions and tighten financial regulation.

Since the outbreak of the global financial tsunami triggered by the collapse of Lehman Brothers in 2008, emerging economies like China have acted as the new engine of the global economy and played a big role in promoting its recovery.

But one and a half years after the global crisis, signs of economic overheating and inflation bubbles have emerged in these emerging countries. How to effectively curb these tendencies is an intractable and pressing task for them in order to maintain stable growth.

The US, Japan and other developed countries have to some degree shown economic recovery under the effect of a series of stimulus packages and some market factors.

However, this "positive" economic data, indicated by industrial production and export volumes, have not changed the fact that developed countries are under renewed risk of deflation in the context of the pervasive sovereign debt crisis in European countries and a turbulent euro.

In developed markets, the scale of fund-raising by enterprises through the issuance of securities and shares has almost declined to the level it did shortly after the collapse of Lehman Brothers.

The debt crisis in Europe, which has been intertwined with the banking system, has increased the continent's financial risk. Banks' reluctance to lend has also added to the economic shrinkage.

The emerging deflation in developed countries, along with growing inflation in developing ones, has plunged the world into a "double dip" economic landscape, which is unfavorable for simultaneous recovery of the developed and developing countries.

For inflation-plagued developing countries, any withdrawal of stimulus packages early will possibly sabotage the world's joint efforts for global economic recovery and push it to hit bottom a second time round. However, their adherence to stimulus measures is also likely to brew a more serious bubble.

At the same time, developed countries' adherence to emergency measures will undoubtedly contribute to the flow of world capital to emerging markets, which will not only hamper their own efforts to extricate from a deflation scenario, but will also contribute to the expansion of bubbles in emerging markets.

The International Monetary Fund (IMF) has repeatedly stressed that the withdrawal of the counter-crisis stimulus packages should be made only after a sound financial infrastructure is set up across the world and after a market-driven economic recovery is achieved.

At the same time, the IMF has also called on member nations to conduct policy coordination and phase out stimulus packages in an arranged and negotiated way so as to jointly maintain global economic stability.

Germany, as a key player in maintaining European economic stability, has chosen to adopt a tight fiscal policy, abandoning its past tax reduction policy and taking no effective measures to boost domestic demand.

The largest European economy has also failed to take measures to promote balanced regional investment, rejuvenate industries and help expand exports of other members in the euro zone. These financial policies have aggravated the regional financial and fiscal instability.

The US, however, has chosen to aim at dominating the process of ongoing reform in global financial supervision and monitoring.

Preoccupied with its own export expansion, the world's largest economy recently declared it would first cut financial spending, a move mainly aimed at rejuvenating the dollar in defiance of other countries' efforts to pursue the stability of their currencies and finances.

Japan has closely focused on bagging more Asian infrastructure construction orders, an alluring cake at a time of economic slowdown. Tokyo's mercantile approach and its aggressive overseas expansion strategy in environmental protection and energy, which has accelerated the outflow of its funds, has made it more difficult for developing countries to implement policies aimed at containing inflation and bubbles.

The counter-crisis measures adopted by developed countries, together with brewing risks in international commodities and financial markets, will be unfavorable to policy coordination efforts agreed upon during previous G20 summits and global efforts to maintain world economic recovery.

The G20 has evolved into one of the most important venues for global policy coordination since the Pittsburgh Summit. At a time when the global economy is facing a "double dip" scenario - measured as inflation in developing countries and deflation in developed ones - ways to use the multilateral platform to promote sound financial strategies across the world and push for financial stability will determine future global economic recovery.

The author is a researcher with the China Institutes of Contemporary International Relations.

(China Daily 06/18/2010 page8)