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Friday, G20 finance ministers are meeting in London to debate when to reverse the massive fiscal stimulus pumped into the economy in the wake of the global economic crisis, amidst calls to curb bankers' bonuses, tighten financial regulation and reforms of international institutions.
A year after the crisis engulfed nations around the globe and with countries like Japan, France and Germany now officially out of recession, the G20 has shifted gears and is now focusing on ensuring sustained and deep-rooted economic recovery.
G20 leaders after their London summit in April had agreed to 1.1 trillion dollars of support. Since then the global economy is seeing signs of recovery with stock markets rising since March and growth returning in a number of countries.
Recent statistics suggest that while leading economies are getting stronger, the road to recovery may be rocky.
The Organization for Economic Cooperation and Development (OECD) said Thursday the U.S. and eurozone should emerge out of recession in the third quarter, but warned of a possible "bumpy" recovery which could be hampered by unemployment.
The main focus of the London meet will be when to reverse--although with caution--the fiscal stimulus packages and government bailouts which states pumped into their economies after the credit crunch.
Policymakers are likely to keep economic support packages in place for some more months until recovery is certain and will seek to reassure financial markets they have credible plans to withdraw the stimulus only when appropriate. This was reflected when on the eve of the meeting leaders warned the situation is still fragile and there is no room for complacency.
"The crisis is not over," said the leaders of Britain, France and Germany, Europe's three largest economies, in a joint letter released Thursday. "It is of key importance that the heads of state and government seize the opportunity offered by this summit... in order to avoid a repetition of the present crisis," the letter said.
British Prime Minister Gordon Brown, French President Nicolas Sarkozy and German Chancellor Angela Merkel said while G20 leaders must fully implement stimulus plans, they should also, at the same time, "work on exit strategies to be implemented in a coordinated manner as soon as the crisis has ended."
Germany, wary of inflationary pressures, has also stressed on the need for exit strategies while Britain, which is still in recession, has been more cautious.
British host Alistair Darling warned against complacency due to emerging signs of recovery from the world's worst global financial crisis since the Great Depression.
The biggest single risk to recovery is that people think the job is done, he said. There is a real risk that either governments or people generally think "We have done that, we are on the path to recovery," he added.
European Central Bank chief Jean-Claude Trichet also urged caution. He has said that even though the "significant contraction" in economic activity had ended and would be followed by "very gradual recovery," he warned Friday that it is premature to declare the financial crisis over.
Stressing the importance of the exit strategy should not be confused with its activation, he said, it is premature to declare the financial crisis over. "Today is not the time to exit," he added.
Meanwhile as signs of a return to a bonus culture appears, policymakers are facing aggressive European calls to crack down on the lucrative compensation packages, which many argue encouraged excessive risk-taking and fueled a short-term pursuit of profit that lead to the financial system being destabilized.
Indicating they were nearing agreement on the issue, Brown, Sarkozy and Merkel, in their letter, urged "binding rules" to stop the return of "reprehensible practices," and an end to guaranteed bonuses while supporting rewards for long-term, not short-term, success.
While Sarkozy has led calls for a mandatory cap on bonuses which won wider support at a meeting of European finance ministers in Brussels Wednesday, Britain, eager to safeguard the London's reputation as a major world financial center, is cautious about the move but wants to peg bonuses to long-term performance to discourage unnecessary risk-taking.
French Finance Minister Christine Lagarde said Thursday that members of the group would be pressing the U.S., which is wary of the French initiative, to join the European-led move on bonuses.
"It has to be an international agreement, and we need to use our strength, our conviction with our colleagues to really set up this platform," Lagarde said in London, ahead of the finance ministers' two-day get-together.
The United States, meanwhile, will be pressing for the need for stronger capital and liquidity standards for banks.
"At the core of our endeavor must be making capital standards for financial institutions stronger," U.S. Treasury Secretary Timothy Geithner said.
Other issues on the agenda of the G20 meet include ensuring international institutions like the International Monetary Fund (IMF) get the full resources promised to it at April's London summit, when the world was still in the grip of a major recession.
Besides policymakers will also discuss how the IMF and the World Bank can be reformed to reflect better the emergence of the new economic powers. They will also look at enhanced regulation of systemically important banks and ways in which these institutions can be wound up if needed without shaking the financial system.
The world's richest countries--the United States, Japan and China--plus top European nations and emerging powers like China and India will use the meet to prepare for a full summit of Group of 20 leaders in the U.S. city of Pittsburgh on September 24-25.
Representatives from BRIC countries--Brazil, Russia, India and China--will meet on the sidelines of the larger gathering and U.S. Treasury Secretary Timothy Geithner is expected to join them.
The London meeting will be attended by finance ministers and central bankers from other G20 countries like Argentina, Australia, Canada, Indonesia, Italy, Mexico, Saudi Arabia, South Africa, South Korea, and Turkey.
The Netherlands and Spain will also be represented along with heads of bodies, including the World Bank, International Monetary Fund and European Union.
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