As the final preparations are completed prior to the arrival of the G20 attendees in Toronto, what only a few days ago appeared to be a meeting of mostly like-minded world leaders, now appears somewhat fractured. Two areas in particular threaten to remain divisive Ã¢â‚¬â€œ the implementation of a punitive Ã¢â‚¬Å“bank taxÃ¢â‚¬Â, and the continuation of government stimulus spending.
Bank Tax Favoured By Europe
Few would argue against the notion that the large banks, particularly major investment banks in the US and western Europe, were largely responsible for triggering the recent recession. Having to then use tax-payer money to save the banking industry, only rubs salt into the wound. It is easy to understand how a new tax to raise funds to pay back loans and to stockpile funds in the event of a future meltdown, is an easy sell to an increasingly jaded public.
But hold on a minute. Banks were not universally at fault. In fact, banks in several countries Ã¢â‚¬â€œ particularly Canada and Japan Ã¢â‚¬â€œ did not require government help and actually came though the crisis in a stronger positions vis a vis their counterparts in Europe and the US. Why should responsible institutions be Ã¢â‚¬Å“punishedÃ¢â‚¬Â along with those that did engage in questionable practises?
That is precisely the point CanadaÃ¢â‚¬â„¢s Finance Minister Jim Flaherty made at a press conference earlier today in Toronto. With the G20 Summit acting as a backdrop, Flaherty urged attendees to stick to the agenda centered on the need for a Ã¢â‚¬Å“coordinated and sustainedÃ¢â‚¬Â effort to ensure the global economy does not succumb to a follow-up recession.
In addition, Minister Flaherty made it clear that Canada will not implement a bank levy even as calls to introduce a world-wide tax increase in Europe. Flaherty conceded that it is Ã¢â‚¬Å“likelyÃ¢â‚¬Â that some countries could act unilaterally and increase taxes in the banking sector; a move which Flaherty said could have Ã¢â‚¬Å“market consequencesÃ¢â‚¬Â that might entice banks to increase activities in jurisdictions with lower tax implications.
Timing to Scale Back Stimulus Spending
In addition to talks around the bank tax, there will also be discussions on the merits of government stimulus efforts. Part of what Flaherty meant by a Ã¢â‚¬Å“coordinated and sustained effortÃ¢â‚¬Â is the continuation of policies to ensure the global recovery is not cut short. Flaherty was actually echoing comments made earlier this year, by the International Monetary Fund. The IMF warned against ending stimulus efforts too early, thereby cutting the first steps towards recovery off at the knees.
While noting that the global economy is recovering, Ã¢â‚¬Å“for the moment, the recovery is very based on government policy decisions and policy actions,Ã¢â‚¬Â noted IMF Chief Economist Olivier Blanchard in an interview in January. Ã¢â‚¬Å“Right now itÃ¢â‚¬â„¢s OK, but a year down the line, it will be a big question.Ã¢â‚¬Â
The need for further government spending however, is problematic for regions facing massive deficits. Both Britain and the EUÃ¢â‚¬â„¢s largest members have committed to a reduction in spending to deal with ballooning deficits and stimulus spending is one of the first items to be reeduced.
In GermanyÃ¢â‚¬â„¢s recent budget, spending cuts totalling 80 billion euros (US$107 billion) have been identified. Billionaire investor George Soros was aghast at the cuts, and in particular the timing, saying that such a move by Germany will be a Ã¢â‚¬Å“danger for EuropeÃ¢â‚¬Â. And in a line that could well have come from Euro Zone skeptic Milton Friedman, Soros said GermanyÃ¢â‚¬â„¢s actions could Ã¢â‚¬Å“destroy the European projectÃ¢â‚¬Â.
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