G20 on the money

Flaherty argues summit will pay off in prestige

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The Gazette, Wednesday, June 23, 2010

Leaving aside fake lakes and security costs, the question is: What are the substantive issues on the agenda of the G8 and G20 summits in Ontario this weekend?

Let's ask Jim Flaherty, he'll know. As finance minister of the host country, he's got the frequent-flyer miles, though not the points, to show for it.

In recent weeks, he has been to India, South Asia, China, South Korea, Washington, and New York, fleshing out the summit program with G8 and G20 finance ministers and central bankers, as well as making it clear that a global bank tax is a complete non-starter with Canada as the host country.

"The bank tax is dead," Flaherty said flatly the other day when encountered between weekend events in Whitby, Ont., where his wife, Christine Elliott, represents the same riding of Whitby-Oshawa at Queen's Park.

Proponents of a bank tax have different names for it: The British call it a global bank levy. The International Monetary Fund proposed it as a "Financial Activities Tax," or the perfectly named FAT tax.

Here's all you need to know about it: The Americans, British, Germans and French -four of the five founding members of the G5 economic summit in 1975 -were all in favour of the FAT tax.

The Canadians, Japanese, Chinese, Indians, Mexicans, Brazilians, Australians and other members of the G20 were against it. There was a time when the G5 and later the G7 could have imposed their economic and financial agenda on the rest of the world. But now the emerging economies, with Japan and Canada, have them outnumbered and surrounded. Welcome to the new world economic order, created out of the panic and chaos following the collapse of global markets in the fall of 2008. It was the American, British, French and German banks that created the problem with the commoditization and securitization of financial services and products in the first place. Why should other countries pay for them allowing their banks to be run like pyramid schemes?

Which isn't to say financial sector reform isn't on the agenda of the G20. Flaherty doesn't expect a full consensus before the next G20 in Seoul in November, but says the G20 is "addressing what actually happened back in 2008." What happened is that banks sold mortgages and other products to third parties, taking responsibility for them off their own books.

The remedy isn't a bank tax to be run like a rainy-day fund, but as Flaherty suggests, caps on leverage and higher capitalization requirements, to say nothing of down payments on mortgages. The Canadian banks have proven to be a solid financial model, a safe port in the financial storm. The bank towers of Toronto aren't just the backdrop for the G20, they're a symbol of stability amid the turmoil that eviscerated the market value of American and British investment and retail banks.

In the aftermath of the reckoning, as the National Post reported last weekend, Toronto is now home to "five of the top 10 banks in North America and Europe." The Post reports that according to the Global Financial Centres Report, Toronto is the world's 12th-ranked financial centre, just behind Shanghai and ahead of Frankfurt. (Montreal ranks 25th, behind Dubai, and tied with Melbourne).

Three other items dominate the financial menu of the summits. First, says Flaherty, "strong sustainable growth," with discussion headings that include exit strategies from stimulus and "fiscal consolidation." No one wants to get out of the stimulus business before recovery takes hold across the G20, but that's a call for each member country. But exiting stimulus is part of the conversation about what Flaherty terms "deficit-reduction targets in the G20." Canada wants the G20 to follow our five-year plan to return to budgetary balance by 2015 or 2016. That's do-able for us -the Canadian current deficit is three per cent of GDP, while the Americans and the Brits are at 11 and 12 per cent of GDP.

Then, Flaherty says, the G20 will be "asking the growing economies to ensure more domestic demand" rather than emphasizing exports. This requires what Flaherty euphemistically calls "flexibility on exchange rates." Or in plain language, getting the Chinese to agree let the yuan rise, which they signalled last weekend that they are now to do.

There are two other financial agenda items -quota reform of the international financial institutions, the IMF and the World Bank. What it comes down to is the G20 wants to break the monopoly of the US. and the White House on naming the head of the World Bank. And finally all G20 leaders will sing the praises of free trade and denounce the evils of protectionism. More lip service to the endless Doha Round of global trade talks.

Is it worth it for Canada, for all the cost and controversy, to host these summits? What do we get out of it? For Flaherty it's a no-brainer.

"We solidify our participation," he says, "in the world's economic leadership."

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