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G20: Finance Ministers Meeting


6.33 pm

The Financial Services Secretary to the Treasury (Lord Myners): My Lords, with the leave of the House, I will now repeat a Statement made in another place by my right honourable friend the Chancellor of the Exchequer on the G20 Finance Ministers’ meeting. The Statement is as follows.

“Mr Speaker, with permission, I would like to make a Statement about the meeting of G20 Finance Ministers and central bank governors held on Friday and Saturday, to prepare for the meeting of leaders and Finance Ministers in London next month.

Since November, when the G20 last met in Washington, we have seen a collapse in international trade. This is a much deeper and more widespread economic downturn, with every country in the world affected. In October, the IMF was forecasting world growth this year of 3 per cent. Now it predicts negative global growth for the first time in 60 years. At the meeting, it was clear that every G20 country was determined to act together to restore growth, take steps to restore bank lending and prepare for recovery. There was unanimous recognition, too, that we must take action to help emerging and developing economies deal with this global downturn.

We agreed on the following. First, to support our economies, we agreed that we must take whatever action is necessary, for as long as it is necessary, to boost demand and support jobs. Many countries have already taken substantial steps to support their economies. The IMF calculates that in the US this year’s fiscal stimulus is worth 3.5 per cent of GDP; in Germany it is worth 3.2 per cent; in China and France it is worth 2.6 per cent; and here our fiscal stimulus is 3.4 per cent of the economy. We also agreed that we should be ready to do more if necessary—not all countries in the same way or at the same time, but whatever is needed to deal with today’s problems and prepare for recovery.

Secondly, to support people and businesses, it was recognised that it is essential to restore bank lending. It was agreed that countries need to consider the full range of options available, including liquidity support, recapitalisation and dealing with assets for which there is no market or whose value has fallen significantly. In dealing with these assets—something that we, America and other countries are already doing—there is no single solution or overnight fix, but we have developed a common framework so that countries can use the full range of options when dealing with the immediate problems in their banking systems.

Thirdly, on monetary policy, we welcomed recent reductions in interest rates and G20 central bank governors made a commitment to maintain lower rates for as long as it is needed. This is important as it sends a clear signal that central banks all over the world will keep interest rates at low levels to support economic recovery. It was agreed that central banks can also use measures other than interest rates; that is why the Bank of England, the US Federal Reserve and the Swiss Central Bank are currently putting money into the economy through their credit easing programmes.

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It was also agreed that financial supervisory and regulatory regimes need to be strengthened both nationally and internationally. There is a significant consensus emerging, here and across the world, that we need to reform the system of banking regulation. That is why I asked Lord Turner, when he became chairman of the Financial Services Authority in the autumn, to come forward with recommendations on how to strengthen our regulatory regime. He will publish his proposals this week and I expect his overview of the system to cover four broad themes: first, capital and liquidity rules; secondly, remuneration and the links to risk management; thirdly, how to better anticipate risks to the wider economy presented by problems in the financial sector; fourthly, rather than abolishing our single regulator, how the FSA can be strengthened to regulate large complex institutions.

It was clear at the G20 meeting that financial regulation in most countries needs strengthening. In particular, all important financial institutions should be regulated, including those hedge funds that are systemically important. Wider regulation must be complemented by strengthened prudential oversight, by looking not only at individual banks but at how they contribute to wider risks to the economy. In future, banks throughout the world must have sufficient reserves at all times, and regulators need powers to ensure that banks do not overextend themselves.

We must also improve international co-operation, building on the 25 supervisory colleges set up since last year to supervise banks that trade across the world. We also need a joint international early warning system that will enable us to deal with emerging problems sooner. That means working with the European Union, too, recognising the need for co-operation which we have been demanding for some time while at the same time recognising the essential role of national regulators.

We also agreed a range of other measures on international banking supervision: all credit rating agencies need to be regulated; there needs to be full transparency of off-balance sheet exposures; accounting standards will need to improve; regulation will cover payment and bonus systems; and we agreed that tax havens must be opened up—we welcomed recent agreements by Switzerland, Hong Kong, Andorra and Singapore to share information according to OECD guidelines. Here at home, we expect banks to comply fully with their tax obligations. So I can tell the House that I have asked HM Revenue and Customs to publish shortly a draft code of practice on taxation for the banking sector so that banks comply not just with the letter but with the spirit of the law.

The World Bank currently estimates that 129 developing countries, many in sub-Saharan Africa, are facing financing shortfalls, and up to 90 million more people could fall into poverty as a result of this global crisis. We agreed that we must minimise the impact of this on developing and emerging economies, many of which—India, Indonesia, Turkey and South Africa, for example—were represented at the G20. We agreed that this would require a very substantial increase in resources for the IMF and the development banks having the capital that they need. Agreement on total levels of support will need to be reached next month.

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We remain committed to fighting protectionism and maintaining open trade and investment. That is essential if we are to avoid a prolonged downturn. It is also imperative that the international institutions reflect the reality of the day: the IMF and the World Bank were set up 60 years ago. Once, when we talked about the global economy, we meant the West and Japan, but not any more. China, for example, is already the third largest economy in the world. Emerging and developing countries need to be at the table too, so we agreed that the next review of IMF representation should be concluded by January 2011, while World Bank reform must be completed by next spring. We welcomed the recent decision to extend the Financial Stability Forum to cover all G20 member countries.

The G20 leaders and Finance Ministers will meet again in three weeks’ time. We must seize the moment to make a real difference: supporting our economies, dealing with the banks’ problems and preparing for recovery. Ours must be a time for renewal to tackle the downturn and build a more sustainable future. I commend this Statement to the House”.

That concludes my right honourable friend’s Statement.

6.43 pm

Baroness Noakes: My Lords, I thank the Minister for repeating the Statement made in another place. A good subtitle for the Statement would be “Much Ado about Nothing”.

The G20 communiqué is full of platitudes, and the Chancellor’s Statement followed suit. Ever since the Washington summit last year, the Government have been hyping the fact that they now chair the G20. Real action was promised, but they forgot the inconvenient truth that summits and preparatory meetings rarely produce anything concrete, which is why they have been desperately trying to find a reverse gear in recent days.

Only last month, the Prime Minister was quoted as saying:

“The whole point of the G20 is that the whole world must take action to deal with a global problem”.

By last weekend, however, the Chancellor was talking only about,

and the Prime Minister’s official spokesman described,

That is not exactly action-oriented.

The communiqué issued on Saturday started off by bragging:

“We have taken decisive, coordinated and comprehensive action to boost demand and jobs”.

This demonstrates an extraordinary lack of awareness of what the economy feels like to the people around the world, including in the UK, who are still losing their jobs at unprecedented rates.

In keeping with the Prime Minister’s absolute refusal to accept any measure of blame for what has happened in the UK economy, there was not even a collective “sorry” anywhere in the Statement. Surely when they all get together, they could muster up a joint apology. How out of touch can the world’s finance leaders get?

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The communiqué goes on to say that the G20 is also,

What does that mean? It is certainly not the co-ordinated fiscal stimulus which the Prime Minister said last month would be a feature of the G20 meeting. We know that France and Germany have ganged up to prevent that, even if it were ever a real possibility.

Closer to home, will the Minister explain how the Statement puts the UK’s existing fiscal stimulus at 3.4 per cent of GDP, but Parliament was told that it was only 1 per cent at the time of the PBR? There are rumours of the Chancellor coming around to our view that a further attempt at fiscal stimulus would be reckless, given the state of our economy, although it is far from clear that he has yet convinced the man who actually got us into this mess. Will the Minister confirm that the Government are now taking to heart the need for the fiscal sustainability to which the communiqué specifically refers?

The communiqué said that the G20 was committed,

We fully support that, but it has to be more than words. Only last November, the G20 committed itself to rejecting protectionism, and specifically to a 12-month ban on raising new trade barriers. India went home and increased tariffs on soya beans, the US introduced its Buy American programme, and our own Prime Minister talked about “British jobs for British workers”. Does the Minister think that there is any hope of resurrecting the Doha round? As a minimum, does he expect the G20 to go beyond words and produce some genuine bankable commitment to avoiding further protectionism?

The second element of the communiqué was the priority to restore lending. We have been saying for a long time that credit is the most important issue to tackle in our own economy. The Government have regularly been grabbing headlines with various new plans to restore the flow of credit, but they have delivered little. How many mortgage borrowers have yet benefited from the mortgage protection scheme that was announced in December? None has yet benefited. How many businesses have benefited from the scheme to help the car industry, which was announced in January, or the working capital scheme? None has benefited. Whatever the G20 ends up saying about restoring lending, the plain fact is that nothing will help the UK economy unless our own Government turn promises into reality. We have consistently advocated a simple and bold national loan guarantee scheme. When will the Government see the light on this?

Much has been made of the apparent agreement to increase the funds available to the IMF “very substantially”, but what does this actually mean? The Chancellor has already said that he did not even try to reach agreement on a number. The smaller countries have said that they will not contribute until they get more influence, and that is not scheduled to happen before 2011. Can the Minister give any more detail on this “very substantial” increase in funds, which apparently

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will be agreed in detail in a couple of weeks’ time, and can he say what the impact will be on the UK’s finances?

The communiqué committed the G20 to getting on top of the pro-cyclicality bias of Basel 2, which we have advocated for a long time. Yet again, however, there is neither timetable nor detail. We have yet to be convinced that there is a real consensus on this issue. Can the Minister say whether the UK, as one of the countries with banks that are very large compared with the size of our economy, will proceed whatever the state of international agreement? If there continues to be international foot-dragging, will we address the issues? There are many concepts in the communiqué that we support, such as the need for better early warning systems; but again, there is so little detail that we are left wondering whether anything will really change.

Lastly, the Chancellor’s Statement included something which was not in the weekend communiqué—namely, a code of practice for taxation in the banking sector to make banks comply with the spirit of tax law. How will this work in practice? I believe that taxation needs to be imposed by clear law. We do not have purposive legislation. How can a code of practice alter that? Our tax system is so complex—a point which we have continually pressed—that it is difficult to see where the spirit really is. But perhaps that is just another mirror of the G20 communiqué; that is, words and political gestures which conceal the fact that nothing much will happen.

6.50 pm

Lord Newby: My Lords, I am grateful to the Minister for repeating the Statement. I have written as my opening comment that it is very easy to be sceptical about G20 meetings and the noble Baroness has made that point in spades. But it seems to me that whatever one’s doubts about what flows from these meetings, the best hope of avoiding the kind of depression that we saw in the 1930s is that we have a G20-type process and other intergovernmental-type processes taking place, which means that any Finance Minister or Prime Minister who goes outwith the agreements made one to the next at the very least has to justify what they have been doing to their peers. In the absence of any external force, that seems to be one of the most persuasive ways of getting people to toe the line.

Let us take, for example, almost the first statement in the communiqué, to which the noble Baroness referred. It states:

“We commit to fight all forms of protectionism and maintain open trade and investment”.

That would not have been said, and was not said, in the 1930s, which is one of the main reasons why the depression lasted as long as it did. Okay, the Indians have put a tariff on soya beans, which is somewhat different from a tit-for-tat protectionist war. I firmly believe that this process, flawed as it is—anyone who has ever had any negotiations internationally knows the force of them—offers not necessarily the perfect but the best opportunity for avoiding the worst of a prolonged global recession.

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However, it has been suggested, unkindly perhaps, that one reason why the Prime Minister puts so much emphasis on international initiatives is that it is a displacement activity from looking at some of the problems that need dealing with urgently at home. Certainly, on looking at the Prime Minister’s track record on dealing with tax havens, which is 12 years of almost total inactivity followed by the enthusiasm of the convert, one can see why people might think that he is looking externally for that kind of reason.

However, the Government need to take further action urgently on a number of things at home. First, on the crackdown on the tax avoidance of banks, the noble Baroness referred to the wonderful phrase in the Statement that HMRC is to produce a code of conduct to ensure that banks comply with the spirit as well as the letter of the law. She suggested that one of the reasons why these poor chaps have such difficulty in knowing what the spirit of the law is is that the law is more complicated. Did she read yesterday’s Sunday Times about the way in which Barclays has deliberately sought to avoid hundreds of million of pounds of tax? It was not because it did not understand the law, or thought that the law was too complex and the poor souls were confused; it was because it knew that it could make a lot of money and did so assiduously and very successfully. How confident is the Minister that the banks now owned by the Government have stopped this kind of tax avoidance activity? If he is not confident, will he ensure that they are instructed to stop? Will the Minister assure the House that Barclays will not receive any help under the asset protection scheme until it has given a categoric assurance that all the tax avoidance activities exposed at the weekend have ceased?

The Government have accepted the need for reform of banking regulation, particularly in respect of large, complex institutions, and we should bear in mind that three of the five biggest banks in the world are now British. In view of the growing consensus in support of this, will the Minister revisit the idea of introducing at least a modified version of the Glass-Steagall Act into the UK so that we can clearly segregate off the casino-type activities of the investment banks from the straightforward deposit-taking activities of the retail banks? There is no doubt that the majority of people want a straightforward bank that does not do that kind of thing. It is now virtually impossible, unless one goes to a building society, to find a bank which fits that definition.

There are two bland statements in the communiqué, which mean something or nothing. Perhaps the Minister will help us. It says that credit rating agencies are to be regulated and registered. Will that be by means of national regulators alone or will there be some kind of international framework for them? We then have a wonderful statement:

“Accounting standards will need to improve”.

I am sure that accounting standards always need to improve. What do the Government have in mind and when might they improve?

On global matters, the IMF and a number of points made by the noble Baroness, the Statement says that significant additional funding will be going into the IMF. I think everyone can see why that might be

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required at this point. But it is strange that while numbers have been floated in the press, the communiqué was completely silent on them. Does the Minister have any idea of when a decision will be taken on the scale of that increase? Finally, why will it take until January 2011 to complete the review of IMF quotas? One would have thought that it was a mathematical exercise of working out the current size of the various countries’ economies within the global marketplace and accepting that the quotas should reflect them. It seems bizarre, perverse and unacceptable that we should have to wait nearly another two years to do that straightforward exercise.

6.57 pm

Lord Myners: My Lords, “Much Ado About Nothing” says the noble Baroness, Lady Noakes. It is quite the contrary in my view. A considerable amount has been achieved over a short period, which will have a very real impact on the lives of people here and throughout the developed and developing world. I salute the Chancellor of the Exchequer, the other Finance Ministers and the central bank governors for a thoroughly industrious and worthwhile outcome from a weekend of work here in the United Kingdom.

The report, far from achieving little, is full of initiatives. There was significant agreement about the importance of fiscal stimulus and recognition that that is critical to driving the world out of this global recession, but also recognition that each nation has its own issues in terms of fiscal management and that a single solution does not fit all. It will depend on the precise circumstances of the fiscal regime in each country, but the key thing is to have a continued, concerted and effective fiscal stimulus that provides demand from the public sector to absorb the capacity which is no longer being used because of the crisis of confidence in the private sector. There will be detailed reviews of fiscal stimulus and calls to report to the G20 and the IMF on the actions that are being taken globally on fiscal stimulus in recognition that this needs to be done by nearly all countries if we are to pull the world economy out of this global downturn. Similarly, there are clear commitments on monetary policy from central bank governors throughout the G20 countries: to keep interest rates low for as long as necessary and—to follow the lead set by the United States of America and the United Kingdom—to consider and, if necessary, implement credit and quantitative easing, with or without complex formulae.

There was also a series of co-ordinated actions on regulatory issues. On the macro front, there is reform to the IMF, enlargement of the financial stability forum—a small, under-resourced unit that has achieved a great deal and which I, and others, believe can play an important role in future—and a commitment from the full G20 group to root out the deleterious effect of tax havens. On the micro level, much was achieved through agreement: on bank lending ratios, on liquidity management in addition to capital management—a clear deficiency of the Basel approach to managing bank capital—and on embracing within the regulatory regime the non-banks that have had such a damaging effect on the downturn of the global economy. I refer to the shadow banking sector— organisations that

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looked and behaved like banks but were not regulated like banks. Clearly, there was also agreement that this is a real global challenge, not one linked to a few countries but, rather, one which the world has to unite behind to find solutions.

The noble Baroness said that she is picking up some suggestions that the Chancellor is now of the view that further attempts at fiscal stimulus would be reckless; we shall await the judgments he reaches on that in the Budget, but whatever they are, we are committed to sustainable fiscal management. That is why we have taken the quite extraordinary step of spelling out changes that will be introduced once the economy is recovering in terms of slowing the pace of growth in public expenditure and identifying tax increases that will then be introduced. There is a clear statement on protectionism, which I welcome. As the noble Lord, Lord Newby, said, it is important that that comes at the top of the G20 communiqué.

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