As prepared for delivery
WASHINGTON - I thank the Woodrow Wilson Center for the
opportunity to share our thoughts on Mexico’s G-20 agenda and the upcoming
Today, I would like
to address two issues: first, a Treasury
perspective on the financial agenda heading into Los Cabos; and second, with
the Summit approaching, recent questions from some think tank and academic
quarters about the G-20’s relevance.
El Camino a Los Cabos
In the financial
sphere, three topics will dominate the Los Cabos agenda – the global economy;
reform of the international financial institutions (IFIs); and strengthening
the international financial regulatory agenda.
Clearly, how to
strengthen global economic growth will be the top priority. After
some stalling in momentum in 2011 and serious financial stress late last year,
the outlook has improved. But the
recovery remains fragile, facing continued downside risks. Many advanced economies are still struggling
to recoup output lost during the crisis. A healthy recovery requires faster growth and
job creation, and a careful balance between growth and sustainable fiscal
policy, central bank support and structural reform. Strong implementation of G-20 commitments is
needed and we look forward to the Los Cabos Action Plan.
The U.S. economy
continues to gather strength despite higher oil prices. U.S. growth has averaged about 2-1/2 percent
since the recovery began, and the economy has added private sector jobs for 25
straight months, totaling 4.1 million jobs. The business sector’s balance sheet
is stronger. Household debt to income
has come down significantly and U.S. financial sector debt has decreased. Reflecting early action on repair and reform,
U.S. banks are strongly capitalized, improving confidence and facilitating an
expansion in credit to the private sector.
While the economy is gradually firming, the financial crisis put our
economy in a deep hole and it will take time to fully repair the damage. Unemployment remains high, the housing market
remains weak, and growth is not as fast as we would like. The Administration has laid out a blueprint
that proposes action to support growth in the short-term so as not to
jeopardize the economic gains of the last three years.
Alongside measures to support growth, the President has also outlined a
balanced approach to address our formidable long-term fiscal problem. Including legislation signed into law last
year, this approach would reduce the deficit by more than $4 trillion over the
next decade, cutting the deficit in half as a share of the economy and helping
to put our nation’s finances on a sustainable course.
Euro area fragility remains a key risk to our recovery and the global
economy, as recent market volatility reminds us.
Europe’s leaders have taken important action in recent months to
strengthen their crisis response, reduce financial stress, and lay the
foundations for greater stability. They
have bolstered the firewall to
guard against further emergency financing needs from euro area members;
successfully extended large amounts of liquidity and implemented an accommodative
monetary policy; and strengthened fiscal compacts. Euro-zone members are adopting tough reforms. The
success of the next phase of the crisis response will hinge on Europe’s
willingness and ability to apply its tools and processes creatively, flexibly
and aggressively to support countries as they implement reforms and stay ahead
of markets, and to provide confidence to markets and the public that the
political resolve is there to surmount the problems in the euro area and
preserve a lasting monetary union.
This will require
sustained efforts in the presence of many challenges. How will Europe balance fiscal austerity in
some countries with the need to spur growth, avoiding counter-cyclical fiscal
policy at the European level and a downward spiral of austerity? Will countries with fiscal space let
automatic stabilizers work, supporting euro area growth? Will Europe create fiscal institutions to
match the depth of monetary integration? Will Europe implement structural reforms
essential for growth? Will efforts be
intensified to strengthen supervision and regulation and support bank
restructuring and recapitalization at the European level? How will Europe address its internal current
Oil prices also present a risk to global growth. Over the past
few weeks, crude oil prices have fallen and global oil inventories are
rising. But we must remain vigilant to the risks of supply disruptions
and their economic impact.
Beyond the near-term challenges facing Leaders at Los Cabos, the G20
cannot lose sight of the need to put in place policies for a better-balanced
global economy, pursuant to the Pittsburgh Summit Framework for Strong,
Sustainable and Balanced Growth. Current
account surpluses and deficits are down from pre-crisis levels, but much of the
decline is cyclical and further action is needed to guard against unsustainable
As current account deficit countries such as the United States work to
raise domestic savings, the global economy and job creation are being hindered
by insufficient aggregate demand. We
need to see stronger acceleration of growth in domestic demand in current
account surplus economies, such as in Germany and in emerging Asia, supported
by greater exchange rate flexibility in countries such as China.
Turning to the IFIs,
further progress has been made this year with the conclusion of the recent
agreement to mobilize an additional $430 billion in bilateral resources for the
IMF. While these resources will be
available to all IMF members, the additional funding will provide an important
complement to Europe’s recently-bolstered firewall if further emergency
assistance is needed for euro area members.
At the recent G-20
ministerial, Ministers also focused on strengthening IMF surveillance. The key to strong surveillance is
high-quality, thorough and transparent analysis, effectively integrating
bilateral and multilateral activities and examining the full range of policies. But it is crucial to remember that the Fund
was created against the backdrop of the beggar-thy-neighbor currency policies
of the 1930s and that rigorous surveillance of exchange rate policies must remain
at the core of the Fund’s global mandate.
discussions will also take place for the rest of the year on how to bolster the
relative economic weight of dynamic emerging markets, such as Mexico, in the
We also look forward
to further progress on the international financial regulatory reform agenda.
This successful agenda is now transitioning from design to implementation. This year in the G-20, we are emphasizing
- Implementation of new capital rules,
particularly on ensuring consistent definitions of capital and measurement
of risk-weighted assets across jurisdictions;
- Strengthening cross-border resolution
regimes, ensuring that recovery and resolution plans are in place for
globally systemic institutions;
- Aligning rules and regulations on
trading, clearing and reporting of standardized OTC derivative contracts;
- Promoting international agreement on
global margins on uncleared derivatives trades and creating a legal entity
identifier system for financial contracts, a new global standard that will
help us understand and monitor systemic risk.
- Advancing progress on better
understanding the risks posed by the “shadow banking” system where credit
intermediation occurs outside the regulated banking system and providing
recommendations to limit those risks, as necessary.
Is the G-20 Still Relevant?
substantial work is being undertaken, some analysts are raising questions – is
there a G-Zero, is the G-20 still relevant, is the G-20 succeeding? In posing such questions, it is critical to
stipulate the standard by which the G-20 is being assessed. Some lament the absence of global governance;
some lament “national interests” being placed ahead of “global interests”; some
might prefer a more concentrated international order.
The reality is that
we live in a world of nation-states with economic weight now more widely
dispersed, and a world of interdependencies and spillovers necessitating
cooperation among nations. And there is,
of course, complexity in greater numbers.
Still, when the G-20
came together in Washington and London, the world faced a deep crisis, common
to all, that threatened to turn into a global depression. This was not just a crisis that major
advanced economies alone could tackle.
Facing severe global economic hardship, G-20 countries all had an
interest in doing whatever it took to prevent
a dangerous, synchronized global fall in economic activity.
With recovery, G-20 countries
now face differing economic conditions, and policies need to be tailored to
individual circumstances. Some countries
are in surplus; others in deficit. Some
have fiscal space; others do not. Some
are concerned about overheating; others face output gaps.
The G-20’s strategy to
promote global rebalancing is embodied in the Pittsburgh Summit Framework for
Strong, Sustainable and Balanced Growth.
As I noted, this Framework emphasizes the roles and responsibilities of
surplus and deficit countries. As we all
know, the formulation of economic policy takes place against the backdrop of
domestic realities. Nonetheless, the
ongoing mutual assessment process built around the Framework has heightened
policy-makers attention to the policies they must promote to foster greater
balance in the global economy. It is a critical
exercise in international “peer pressure”, reminding countries of the
international ramifications of their domestic actions, and unlike G-7
multilateral surveillance exercises, it is being done at the Leaders’ level.
At Pittsburgh, the
G-20 was designated the premier forum for international economic and financial
cooperation, transforming the G-7 oriented architecture of past decades. Other facets of the architecture were also modernized.
Through two rounds
of quota reforms at the IMF over the last decade, strongly backed by the United
States, dynamic emerging market economies are seeing their weights in the Fund
increase substantially. At Pittsburgh,
the United States led the effort to shift at least 5 percentage points in quota
shares to dynamic emerging markets. At
Seoul, the United States helped secure an agreement by which advanced European
economies committed to decrease their IMF Board representation by two seats. There is now a clear international consensus
that the weights of dynamic emerging markets in the Fund should continue to
rise in the future.
Stability Forum was transformed into the Financial Stability Board, with all
G-20 members joining. Standard setting
bodies such as the Basel Committee also expanded to include the G-20. With key emerging markets joining the FSB,
the scope of international financial regulatory standards now encompasses the
financial regulatory agenda has made major strides. G-20 Leaders and Finance Ministers, working
through the FSB, have helped shape the reform agenda and timelines, while
respecting the independence of standard setting bodies. In past years, the G20 agreed on the broad principles
and objectives for international financial regulatory reform – such as raising
the quantity and quality of capital, increasing the transparency of OTC
derivatives markets, extending the perimeter of regulation. Already, this agenda is well in train, as
evidenced by agreements such as Basel III.
While current FSB work
is not headline grabbing, efforts to align nitty gritty regulatory policies are
ongoing and advancing, precisely because the G20 early on agreed to put in
place high quality standards in an internationally consistent manner and avoid
a race to the bottom. There can be no
doubt -- the global financial system is now more resilient and less dangerous.
The financial agenda
at the heart of the G-20 is substantial and meaty. While the climate for advancing this agenda
now is different and more complex than in 2008-2009, G-20 cooperation continues
It would not be realistic
to expect that participation in any “G” grouping would trump national
interests. Nor would it be realistic to
think the G-20 would displace other channels for cooperation, such as informal G-7
discussions, BRIC gatherings, U.S.-China bilateral discussions and the
like. Still, the G-20 led financial architecture
continues to evolve, helping facilitate rebalancing, better aligning the voice of
dynamic countries with their growing weight in the world economy, and strengthening
financial regulatory reform.
There is critical
work to be done in Los Cabos and over the remainder of the Mexican Presidency. Mexico is successfully managing and advancing
the reform agenda and this is testimony to the excellence of its officials.
ante a Los