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Los Cabos Summit of G20

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Safeguarding European monetary union

Crisis has its own utility in human life. When things go normally, people tend to overlook fundamental systemic anomalies believing that they hardly exist. It is only when things do not remain normal any longer and a crisis situation looms large, do people recognize the  anomalies and the systemic faults even as they struggle to find the reasons for the crisis. What follows are reforms aimed at correcting the faults and thereby ensuring that a similar crisis does not occur in the near and distant future. In the process of bringing the global economy back on track, much needed global economic reforms agreed by the major economies of the world, albeit after much debate and deliberation finally seem to be on the anvil.
G20, in order to fight economic slowdown and combat corruption, has expressed confidence that $450 billion firepower of the International Monetary Fund (IMF) would help in safeguarding financial stability and preventing global crisis.  It has called for collective action to deal with financial market tensions and promote trade, growth and jobs. The entire cynosure of the summit was to evolve effective ways to get rid of contagious eurozone debt crisis. G20 has urged Europe to take concerted effort to resolve financial crisis. The European leaders said they will take all necessary measures to safeguard the integrity and stability of the euro zone to improve the functioning of the financial markets.

Role of Europe, IMF and emerging economies in combating crisis:

  1. They are intended to work on concrete steps to integrate their banking sectors, a major step long pressed by the United States and other nations to break the cycle of debt-laden countries bailing out their troubled banks which only pushes governments ever deeper into debt.
  2. The eurozone leaders have moved closer to agreeing that the two bailout funds, the European Financial Stability Facility (EFSF) and the forthcoming European Stability Mechanism (ESM), will be able to buy the sovereign bonds of struggling member states on the open market. The aim being that such a move would reduce the borrowing costs of nations such as Spain and Italy, as it would help to lower the yields on the bonds. The EFSF and ESM have combined funds of about 500bn euros ($634bn; £404bn).
  3. Emerging economic powers, led by China, India, Russia and Brazil, agreed in Mexico to boost the International Monetary Fund's lending pool to $456 billion, with the clear quid pro quo that Europe gets its house in order.
  4. The International Monetary Fund has indicated that it could now be open to a renegotiation of Greece's 130-billion-euro (USD 165 billion) bailout programme.
  5. India and four other countries of the five-nation BRICS bloc have given a big boost to IMF's $430 billion bailout fund for the debt-wracked 17 nation Eurozone pledging to contribute $75 billion with India's contribution being $10 billion. China has agreed to contribute $43 billion while the contribution from Russia and Brazil will be $10 billion each. The South African contribution is $2 billion.

All necessary steps: In the G20 communiqué, euro area countries pledged to "take all necessary policy measures" to safeguard monetary union. Europe also intends "to consider concrete steps towards a more integrated financial architecture", including common banking supervision, bank recapitalization, winding down of failed banks and guarantees for bank depositors. G20 said that these steps would help break the link between government debt and banking problems. Combined with fiscal discipline and measures to support growth, they represent "important steps toward greater fiscal and economic integration" that lead to lower borrowing costs.
The yield on Spanish 10-year bonds fell to 6.86 per cent, dropping below the 7 per cent level seen as unsustainable in the long-run. For Italian bonds of the same maturity, the yield was down to 5.84 per cent.

Concern over US crisis: US has said that Europe had the resources to solve its problems on its own. In fact, US is still struggling to contend with its own economic troubles, therefore, it is not in a position to offer any financial pledges to help its international partners. Russian also emphasised that they was more worried about the fate of the U.S. dollar rather than the euro, noting overall U.S. government debt amounted to $15 trillion.

Gains for India: The Los Cabos declaration fully reflects India's concern over lack of funding for infrastructure among emerging economies and austerity measures being adopted even by surplus countries were endorsed by G20 leaders. Investment in infrastructure is critical for sustained economic growth, poverty reduction and job creation," G20 said, adding the recommendations made by multilateral development banks in this regard must be implemented. This endorsement has certainly enhanced global presence of India.
Background:

The G-20 was formed in 1999. The inaugural meeting took place on December 15–16, 1999 in Berlin. The G-20 was formed as a new forum for cooperation and consultation on matters pertaining to the international financial system. The G-20 aims to foster the adoption of internationally recognised standards through the example set by its members in areas such as the transparency of fiscal policy and combating money laundering and the financing of terrorism.

The membership of the G-20 comprises the finance ministers and central bank governors of 19 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, United Kingdom, United States of America. The European Union, who is represented by the rotating Council presidency and the European Central Bank, is the 20th member of the G-20. To ensure global economic fora and institutions work together, the Managing Director of the International Monetary Fund (IMF) and the President of the World Bank, plus the chairs of the International Monetary and Financial Committee and Development Committee of the IMF and World Bank, also participate in G-20 meetings on an ex-officio basis. The G-20 thus brings together important industrial and emerging-market countries from all regions of the world. Together, member countries represent around 90 per cent of global gross national product, 80 per cent of world trade (including EU intra-trade) as well as two-thirds of the world's population. The G-20's economic weight and broad membership gives it a high degree of legitimacy and influence over the management of the global economy and financial system. G-20’s objectivity depends on ‘Accord for Sustained Growth agreed to in  2004’. The components of the Accord are: (a) The elimination of restrictions on the international movement of capital; (b) Deregulation; (c) Flexible labour market conditions; (d) Privatisation; (e) Enforcement of intellectual and other private property rights, (f) Creating a business climate conducive to foreign direct investment; and (g) Global trade liberalisation through WTO. Unlike international organisations such as the Organisation for Economic Co-operation and Development (OECD), IMF or World Bank, the G-20 (like the G-7) has no permanent staff of its own. The G-20 represents about 90 percent of the world's gross national product, 80 percent of the worlds' trade and two-thirds of its population.