As G-20 summit to focus on a split over approach: Will reining in
spending cut debt, or stall jobs and growth?
The heads of state for the Group of 20 (G-20) - a body that seeks
to coordinate financial regulation and standards across some of the
world's largest economies - will hold a two-day summit in Canada
starting June 26 at which almost all participants are expected to
call for more banking regulation but where some, echoing St.
Augustine's famous prayer, are expected to say "please, not yet."
While most agree major change is needed - the term "radical
reform" is often bandied about by policymakers - they disagree on
The divide between G-20 countries like the United States, which
would like a tough regulatory regime enacted soon to limit the
ability of banks to speculate in financial markets, and countries
like France and Germany, which agree with the approach in principle
but want more time, echoes a debate raging from Dublin to Tokyo.
For two years, industrialized nations have watched their deficits
soar, thanks to bank bailouts and stimulus spending designed to head
off economic free fall. The question now is whether it's time to
rein in spending and start reducing government debt. Some say yes,
but others fear spending cuts could fuel unemployment and drive
economic growth down.
A key component of economic growth is lending, which boosts
consumption and encourages business expansion. But the mooted new
rules would require banks to hold more cash in reserve and lend less
of their capital in hopes of obviating the need for future
That, some critics say, could be another destimulative measure at
a time when countries across Europe are planning steep budget cuts.
"The argument is that this will very significantly add to the
cost of doing business, be passed on to the consumer, and reduce
growth," says Uri Dadush, a former senior economist at the World
Bank who is now at the Carnegie Endowment for International Peace in
Washington. "There's a prima facie argument that there will in fact
be serious costs and that will have to be balanced against the
insurance that [governments] are buying against future financial
Banking industry's case
In mid-June, the banking industry made its case that regulation
will undermine growth. The Institute for International Finance
(IIF), a 350-member group of most of the world's large banks, argued
in a report that the new rules would reduce economic growth by 3
percent in the US, Japan, and Europe and cost more than 9 million
jobs over five years.
"The point of this report is not to argue against regulatory
reform," Peter Sands, CEO of the UK's Standard Chartered Bank and an
IIF official, told reporters at the time. "But there is a price for
making the banking system safer and more stable, and that price will
inevitably be borne by the real economy . …