Calls for reform in G-20 countries to avert the global financial crisis

Calls for reform in G-20 countries to avert the global financial crisis

Prof. Dr. Moustafa El-Abdallah Al Kafry

The Group of Twenty (G20) faces challenges in many areas, such as the stalemate in climate change talks and doubts about the soundness and sophistication of global financial markets. G20 leaders agreed to work together to assess the coherence of policies pursued by individual countries and whether they were collectively consistent with more viable and more balanced growth. They also agreed to transfer some of the IMF’s voting rights from rich countries to inadequately represented countries such as China. This is a new sign of the acceleration of the change in the balance of economic influence due to the global financial crisis.

Any indication of unity of class and decision in the group will help avoid the negative effects of the crisis. But differences of opinion prevail among the leaders of the group’s countries, which will lead to the avoidance of negative effects. [1]

The International Monetary Fund (IMF) warned in 2009, a year after the global financial crisis, that the crisis could hinder the growth of the global economy for at least the next seven years. Banking crises have a long-term impact on the level of global GDP, although growth can be resumed, albeit at low rates, and lower levels of employment, investment, and productivity all contribute to significant losses to global GDP. [2]

The IMF report also noted that there have been 88 banking crises over the past four decades covering most of the world. Global GDP losses in the medium term were the result of major banking crises. Although the continued impact of banking crises is a long time resulting from a decline in production, followed by weak investment, high unemployment and high inflation rates at the global level.

Eurozone economies declined and contracted by 0.2% in the second quarter of 2008 due to the global financial crisis, and the data indicated that the economic performance in the eurozone was weaker than in the United States, whose economy contracted by 0.1% in the third quarter and recorded weak annual growth of 0.8%. The global financial crisis was the main cause of the contraction of the region’s economies, the prevailing recession and the decline in economic growth rates in the largest and third largest economy of the Eurozone (Germany and Italy). France, the eurozone’s second-largest economy, avoided recession and posted slight growth of 0.1%. [3]

The U.S. economy — the world’s largest economy — also declined and the U.S. economy was expected to contract by 2.7 percent in 2009 before rebounding by 1.5 percent in 2010.

When the G20 held its summit in Washington in 2008 during the worsening global financial crisis, former U.S. President George W. Bush set five main goals to avoid the negative effects of the crisis, including:

• Understand the causes of the global crisis,
• Review the effectiveness of the response to them,
• Develop principles for the reform of the financial system and the tools for its regulation,
• Launch a specific action plan to put these principles into practice,
• Reaffirm that the principles of the free market are the safe path to lasting prosperity.

At a time when financial markets are under intense pressure, new measures have had to be taken in order to ease credit pressures and support crumbling economic growth.

Several central banks around the world cut interest rates in their first coordinated public move ever as fears of a deep recession overshadowed concerns about inflation and the measure included a half-percentage point cut in interest rates by the central banks of the United States, the euro zone, Britain, Switzerland, Canada and Sweden.

The U.S. Federal Reserve has cut interest rates by 4.25 percentage points since September 2007 to 1 percent to stave off the credit crunch and support the declining U.S. economy. In addition, the US central bank has launched several facilities for lending and currency swaps to ensure the availability of financing for financial institutions. [4]

Stop the sharp decline in global economic activity:

The International Monetary Fund (IMF) believes that the global economy is beginning to recover in light of the significant improvement in financial conditions in the world. The IMF also predicts that banks’ losses during the period 2007-2010 will reach about $3.40 trillion compared to expectations at the beginning of the global financial crisis that banks will lose about $4.00 trillion.  The IMF’s forecast was that Asia would lead the global economic recovery effort because it withstood financial turmoil better than expected.[5]

The leaders of the Group of Twenty countries also declared their response to the global financial crisis a “success”. This response has helped to stop the sharp decline in global economic activity and stabilize financial markets. (The leaders agreed that their meetings would replace the Group of Seven conferences of rich countries as the main forum for global policymaking and pledged to give rising powers such as China a greater role in rebuilding and reorienting the global economy. While the Group of Seven countries were right to accept the inevitable loosening of their grip on the global economy as a result of the rapid industrial growth of poor countries, analysts say the size and diversity of the group will likely complicate policy coordination.) [6]

Despite the manifestations of solidarity among the G-20 countries, there were some differences. Many Europeans were disappointed by the lack of agreement on ways to finance the fight against climate change and environmental protection. European Commission President José Manuel Barroso announced his concern in a statement: “I do not hide my concern about the slow pace of progress … The time to be serious is now, not later.) The leaders of the GUUAM countries agreed that companies should be entitled to a refund of bonuses in certain cases. The measure aims to ensure that bankers do not receive huge wages for high-risk betting that could cause losses later.

China was expected to play a leading role in resolving the global financial crisis, amid calls from G20 countries that China use its huge financial reserves to lift global financial institutions out of recession. Japan has proposed steps that will help resolve the crisis and avoid the future collapse of the global financial system, including bolstering IMF capacities and advocating tighter supervision of credit rating agencies.

Prof. Dr. Moustafa El-Abdallah Al Kafry

Faculty of Economics – Damascus University

[1] – Christopher Low, Chief Economist at F. ti. The Financial is in New York.

[2] – Report of the World Monetary Agency, Issued simultaneously with the annual meeting of the International Monetary Fund in December 2009 in Istanbul, Turkey.

[3] – Italian official data showed that the Italian economy contracted by a percentage 0.5 percent In the third quarter of 2008, it exceeded expectations to enter its deepest recession in a decade.

[4] -coffee Bernanke, Chairman of the Federal Reserve, US Central Bank.

[5] – Global Money Crisis: Light at the End of the G-20 Tunnel at Stake Amid Calls for a New Financial Order, Al-Naba Information Network- Thursday 8 November 2009.

[6] – Global Money Crisis: Light at the End of the G-20 Tunnel at Stake Amid Calls for a New Financial Order, Al-Naba Information Network- Thursday 8 November 2009.