Taking the reins

The conclusions of the April 2-3 G20 summit were in line with Czech policymakers' desire that member countries restrain further stimulus spending and avoid protectionism, a practice that could be particularly hurtful to emerging and more open economies in Central and Eastern Europe. As a tradeoff, delegates at the London summit agreed to bankroll the International Monetary Fund (IMF), while giving the organization a larger role in giving financial aid.

"What I consider very important is that the delegations did not push for more budget stimuli," said Czech Finance Minister Miroslav Kalousek after the conference. The Czech Republic is already reckoning with a budget deficit between 120 billion Kč ($5.9 billion) and 130 billion Kč next year, in part due to stimulus measures that have cut into tax revenue. Prior to the summit, the United States had indicated it would ask other countries to pledge further cash injections into their respective economies, a measure EU member states opposed.

On a global scale, the most significant step was the decision to bulk up the IMF with a bigger role as a "final creditor" for economies hit particularly hard by the crisis. Leaders have agreed to double the IMF's capital to $500 billion, of which the European Union has agreed to contribute $75 billion.

The summit is being credited for $1.1 trillion in support for the global economy, of which $750 billion includes lending commitments and credit guarantees for the IMF.

For analysts, the amount of the commitment was the biggest surprise out of the conference - an acknowledgement that the IMF will need bigger coffers to deal with the scale and scope of the global recession.

"The funding available to the IMF had been falling in recent years," said Simon Tilford, chief economist at the Center for European Progress. "So the amount available was looking small given the scale of [need] they're likely to face."

Giving the IMF the role of the final creditor also takes any political pressure off other governmental bodies, such as the EU, to lend aid to struggling economies. The specific conditions could be set out by an independent organization and avoid causing any political tensions dependent on whether aid is granted.

"That's one reason why so many European governments are keen on expanding money at the IMF's disposal. ... In the context of Eastern Europe, the EU would much rather the IMF lay down conditions on, hypothetically, Romania, because of the potential political [issues]," Tilford said.

The IMF will handle aid applications and come to bi-lateral agreements with recipients, which will primarily be developing economies. The IMF has not been approached for aid by a developed economy in some time, Tilford added, and, while it's not certain it will happen again, now would be the time.

"There's a greater chance to see it happen again now, but it would have to be quite a small developed economy," he said.

'Brave new world'

While the strategy with the IMF appears to be the more concrete and immediate of the summit's conclusions, delegates also gave commitments to tackling tax havens and tighter international financial oversight and regulation. The long-term effects of tighter regulations, which include restricting bankers' pay and loosening accounting standards that would allow toxic assets to recover, will be positive steps toward "democratizing international financial systems," but short-term solutions are scarce.

"It does very little to address the immediate challenges of existing toxic debts and the contraction of demand," Tilford said. "Individual countries with big trade surpluses will need to get serious about balancing their economies. They can't wait for the U.S. to recover to boost exports. It's a bit of a brave new world, really."

Delegates pledged to put increased pressure on tax havens in a move to end secrecy in the banking sector but declined making a public list of the very worst offenders. Instead, the summit leaders have asked the Organization for Economic Co-operation and Development (OECD) to take the lead in publicizing the three tiers, which rank countries on degree of cooperation in exchanging banking information. The "tax haven" designation is the worst, and goes from there to the black then gray list. The OECD planned an April 7 press conference to outline the OECD's cooperation with the EU on the issue after the G20, and will outline future steps.

"We'll see more concrete results and understand it more in 10 to 20 days," said Richard Husovský, partner at the Lerika Tax consulting company, which gives tax advice to international business clients. "It remains to be seen what kind of rules will be associated with the G20 decision and what consequences they might have on companies that are either registered in these countries or doing business with companies based in countries on the black or grey lists."

Ultimately, the success of the G20 resolutions will be measured by the speed at which the commitments are actually put into practice. While protectionism was roundly condemned, these sorts of harmful policies can be implemented as soon as delegations return to their home countries, Tilford said.

"There was a sort of restated commitment to avoid protectionism; they'll revisit in 2010 any measures that could potentially be protectionist," he said. "But those are just words. We'll have to see."

Claire Compton can be reached at
ccompton@praguepost.com