Financial Risk Manager

This was confirmed just ahead of the meeting of the Group of Twenty (G-20) in Toronto last month, a summit of the world's largest economies, including several developing countries, like India, Brazil and Indonesia, and the European Union (EU). Even though the EU agreed to propose at the summit the introduction of a tax on international financial transactions, also called Tobin tax, this scheme was not approved at the meeting. Canadian minister of finance Jim Flaherty told the press ahead of the meeting: 'I can assure you that the majority of the G- 20 is opposed to this tax.'

The German finance minister, Wolfgang Schaeuble, also excluded the possibility of Germany alone raising the tax. At a press conference in Berlin late last month, he contended that the EU collectively must raise the tax.

The German government is the main supporter of the Tobin tax in Europe. Most European countries except Britain support a tax on financial transactions. Britain opposes it vehemently, arguing that the tax would raise costs of financial operations, compelling operators to operators to move their base of operation elsewhere.

The tax, as originally suggested by Nobel laureate economist James Tobin in 1972, was intended to put a penalty on short-term financial round-trip speculative transactions in foreign currencies. In its most modern version, a very small levy on all international financial transactions is supposed to persuade investment and hedge funds to reduce their speculative operations, which are blamed for the global financial crisis.

The lack of unity among the industrialised countries on the Tobin tax is exemplary for all other areas of international financial transactions. Stern regulations, experts say, are necessary to introduce transparency in the operations of investment banks and funds. But despite this, no regulations have been put into practice.

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G20 meetings are closed to the public and the press. The organization, so unstructured it has no secretariat, is often hard-pressed to get its members to agree on anything. The group of world leaders, moreover, is now holding only its third meeting.

But now Britain’s Prime Minister Gordon Brown tells Reuters that the G20, meeting in Pittsburgh starting Thursday night, will become institutionalized as “the world’s main economic governing council.” “The G20 will take a bigger role in economic cooperation than the G8 has in the past,” said Mr. Brown.

If the next two days do indeed bring that to pass, the result would be a greater voice in the world economy for rapidly developing nations, such as Group of 20 members India and Brazil, economists say. It might also mean that the G8, the group of major industrialized countries that is accustomed to deciding important economic issues, is on its way to becoming the Ford Edsel of international organizations.

In addition, the apparent plan, the details of which have not been made public, would almost certainly raise eyebrows – and probably more – from those who are suspicious of international governing bodies. (Remember the Tri-lateral Commission?)

“There are a lot of folks in various countries that take as a serious issue self-governance,” says Chester Spatt, a professor at the Tepper School of Business at Carnegie Mellon University here. “They have concerns about ceding too much authority.”

Indeed, at a Thursday press briefing, Treasury Secretary Timothy Geithner said he doubted any state would give up its sovereignty for a consensus. But he added, “I think it’s important that we get people to agree all of us are performing together.”

It’s good for nations to talk, says Mr. Spatt. But “usually when one says an institution is really important, the institution has demonstrated importance,” he says, inferring that’s not yet the case for the G20.

With President Obama and the first lady now in Pittsburgh, attention shifts from New York and the United Nations to the work of the Group of 20. The G20 finance ministers first met in 1999 and try to get together annually. They will gather again in November. The member nations account for about 90 percent of the world’s production.

But more than a few economists question whether this body, with just three meetings under its belt, is up to the task of directing the world economy.

“It’s an ad hoc group,” says Simon Johnson, a former economist at the International Monetary Fund (IMF) and now a senior fellow at the Peterson Institute for International Economics in Washington. “They had a good meeting in April, but I don’t think they have demonstrated they are the world’s economic council.”

Last November, as the financial crisis began to ripple through the world, the G20 leaders pledged cooperation to try to stimulate their economies. In April, they pledged financial aid to poor nations. This time, their agenda includes whether member nations should continue with fiscal stimulus, whether to introduce regulation of bankers’ compensation, and perhaps whether and how to balance world economic growth.

Some economists express discomfort about the notion of giving the G20 a lot of influence. One is Stuart Hoffman of PNC Financial in Pittsburgh, who calls the G20 “an important forum, not a governing body.”

But, on a positive note, he says, the G20 format gives smaller nations “more of a voice.”

Even if the leaders include in their final communiqué a reference to the G20 as a governing council, some economists doubt the group’s decision will have any teeth.

“The rich nations control the major institutions, such as the IMF and World Bank,” says Mark Weisbrodt, an economist with the Center for Economic and Policy Research in Washington. “The G20 will still be just a place to talk.”

The talk may yield a press release that sounds as if the G20 accomplished something, says Mr. Johnson. “The leaders just want to escape without a pounding from the press,” he says. “They are just hoping for good press coverage the next couple of days.”

Johnson expects the group will term the meetings a success. However, as Spatt notes, the members have some fundamental disagreements. “The way they will be taken seriously is by action,” he concludes. {#}

Michelle and I look forward to welcoming world leaders to the wonderful city of Pittsburgh on September 24th and 25th and we thank the people of Pittsburgh and Pennsylvania for opening their city as a showcase to the world.

The Pittsburgh Summit is an important opportunity to continue the hard work that we have done in confronting the global economic crisis, and renewing prosperity for our people. Together, we will review the progress we have made, assess what more needs to be done, and discuss what we can do together to lay the groundwork for balanced and sustainable economic growth. Pittsburgh stands as a bold example of how to create new jobs and industries while transitioning to a 21st century economy. As a city that has transformed itself from the city of steel to a center for high-tech innovation—including green technology, education and training, and research and development—Pittsburgh will provide both a beautiful backdrop and a powerful example for our work.

It’s important to note how far we have come in preventing a global economic catastrophe. A year ago, our economy was in a freefall. Some economists were predicting a second Great Depression. Immediate action was required to rescue the economy. In the United States, we passed an historic Recovery Act that quickly put money in the hands of working families, and is putting Americans to work all across the country—including in Pittsburgh and the surrounding area. That includes companies like East Penn Manufacturing, a third-generation family business which is now building batteries for the hybrid, energy efficient vehicles of the 21st century. That includes Serious Materials manufacturing plant outside of Pittsburgh that was shuttered last year, which is now rehiring the workers who lost their jobs and giving them a new mission: producing some of the most energy-efficient windows in the world. And at medical laboratories in Pittsburgh, scientists are making advances in tissue regeneration, which will help people across the globe, including our troops wounded in combat in Iraq and Afghanistan.

The steps that we have taken to jumpstart growth have also been coordinated with our partners around the world. Industrial production throughout the G20 has either stabilized or is growing. Global trade is expanding. Stresses in financial markets have significantly abated and our financial institutions are raising needed capital.
But all of us must remember that our work is far from complete—not when our people are still looking for work. As the leaders of the world’s largest economies, we have a responsibility to work together on behalf of sustained growth, while putting in place the rules of the road that can prevent this kind of crisis from happening again. To avoid being trapped in the cycle of bubble and bust, we must set a path for sustainable growth while steering clear of the imbalances of the past. That will be a key part of the G20 agenda going forward and the Pittsburgh Summit can be an important milestone in our efforts.

In a place known as the city of bridges, we can come together to advance our common interest in a global recovery, while turning the page to a truly 21st century economy.

By working with our friends and partners from around the world, the U.S. is ready to help lead this effort in Pittsburgh and beyond.