News / Economy

G-20 Leaders Wrestle with Debt, Trade, Regulation

Leaders from the world's 20 most important economies gather in Toronto next weekend [June 26-27] to discuss the best ways to guide the global economy into a stronger recovery. 

The leaders gathering in Toronto are from nations that account for 90 percent of global economic output, 80 percent of world trade, and two-thirds of the world's population.

Many of these leaders agree that the global financial crisis made it clear there is a need for better ways to regulate financial firms, but they disagree on how to go about it.

Some finance ministers are calling for banks to lend a smaller portion of their money and to keep more on hand in case a loan or investment goes bad.

Other ideas would limit the amount of borrowed money, or leverage, financial firms can use and seek ways to cope with failing financial companies that minimizes the damage to the rest of the economy.

Jose Vinals of the International Monetary Fund expects leaders in Toronto to decide whether to tax banks to pay the cost of future financial problems.  But he says they will put off making decisions on other issues.

"Toronto will be a crucial time to examine where is progress in order to continue moving the regulatory agenda forward for the final decisions to be taken in Seoul [, South Korea].  This is the expectation," Vinals stated.

Sebastian Mallaby of the Council on Foreign Relations, says it is crucial for the diverse nations of the G-20 to work together to govern their financial firms. "Financial institutions are cross-border; they are multi-national; they are global -- so you ought to have global rules to try and deal with them.  But that is not the way the Congress is dealing with them in the United States and that is not the way I expect European regulators will go either," he said.

Mallaby is the author of a book on financial issues called "More Money Than God" and says international cooperation might fade as trade resumes and many economies continue recovering from the 2008 financial crisis.

Another kind of crisis erupted in Greece as that nation's high levels of debt raised doubts among lenders that they might be repaid.  Efforts to reduce the deficit by slashing government spending sparked riots in Athens.

Europe's stronger economies, especially Germany, gave Greece little choice. They insisted that Greece institute a strict austerity plan as a condition for aid.  G-20 nations also are expected to discuss targets for cutting deficits.

Economist Fred Bergsten of the Peterson Institute for International Economics says the European debt crisis is high on the G-20 agenda and that it is a warning to other nations. "The United States and other countries face similar risks, albeit so far on a smaller scale," he said.  "But if the problems are not corrected, they could be just as big here, just as big in other deficit countries around the world."

The leaders will also talk about global trade imbalances, including the huge trade deficit run by the United States and the massive trade surplus earned by China.  The imbalance is a source of political friction between the two countries.

About a week before the summit, Chinese officials said they would allow trading in their currency to be more flexible, meaning it would probably become stronger.  A stronger Chinese yuan means Chinese-made goods would be more expensive on world markets, which would reduce what Beijing's critics say is an unfair price advantage that contributes to trade imbalances.  Strengthening China's currency would also make goods made elsewhere less expensive for Chinese consumers, drive up imports, and ease trade tensions.  One key question on this issue is how much and how quickly Beijing will allow its currency to change.

Leaders of eight industrialized and mostly wealthy nations, known as the G-8, will get an early start on these difficult issues by meeting Friday and Saturday [June 25-26] at a resort in rural Canada, a short distance from the G-20 meeting in Toronto.

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