The Group of Seven (G7) Finance Ministers’ meeting is to take place in Dresden (Saxony) in Germany on 27-29 May. It will be the Group of Seven’s last major event before the G7’s final full-scale summit at Schloss Elmau in the Bavarian Alps on 7-8 June 2015. The Group of Seven is made up of Germany, the US, Canada, Japan, France, Great Britain and Italy.
The story behind the G7 dates back to 1973, when a meeting of the so-called Group of Five took place involving finance ministers from the US, Germany, France, Great Britain and Japan. The first financial summit in this format was held in November 1975 at the château of Rambouillet in France. Canada joined the club a year later and the European Union joined in 1977 as a mouthpiece for the interests of its member countries.
The foundations for the G8 were laid in 1994 at a summit in the Italian city of Naples. The first part of the summit took place in the G7 format, but the second part was held in the format of the G8 with the participation of the Russian president as an equal partner. The summit in Lyon (France) in June 1996 was held in three stages: the first (in the format of the G7) covered a number of international economic issues, while the second and third were dedicated to discussions on a wide range of global and foreign policy issues with the involvement of Russia. Russia joined the G8 as an equal partner at the Denver summit (US) in 1997. In the Final Communiqué, the partners recognised that Russia had completed “an historic transformation into a democratic state with a market economy”.
At the beginning of 2014, Russia took over the presidency of the group. The G8 summit in 2014 was expected to take place in Sochi on 4-5 June. In March of that year, however, the leaders of the G7 decided not to travel to Sochi and Russia was virtually excluded from the G8. The official reasoning for this decision was “Russia’s violation of Ukraine’s sovereignty and territorial integrity”.
The finance ministers and heads of the central banks of the seven countries will meet at the financial summit in Dresden. The agenda of this summit will largely echo the agenda of the future summit in Bavaria. What kind of issues will be looked at?
Firstly, ensuring stable, long-term economic growth in the world.
Secondly, issues related to the growth of global debt in general and specific issues related to disentangling the ‘debt knots’ in a number of ‘critical’ countries.
Thirdly, the fight against financial terrorism.
And fourthly, international measures to combat tax evasion.
With regard to economic growth, last month the IMF issued its forecast for 2015 – a 3.5 per cent increase in global GDP. However, there is little confidence in the estimates of the IMF and other reputable organisations, since estimates like these are adjusted several times every year. And the GDP figure is false, since half is made up of the same kind of ‘foam’ (a variety of ‘services’ and ‘products’ of the financial and other virtual sectors). Professional economists and politicians rely more on intuition, and this is telling them that it is going to be enough of an achievement keeping the economy at the same level as the previous year without sliding into the crisis pit. The IMF’s forecast is based on the premise that the global economy will not be engulfed by a second wave of the financial crisis in 2015. But no-one has that much confidence, including the IMF officials themselves.
Here, the first item on the agenda flows seamlessly into the second item, which relates to the global debt situation. A global debt analysis report published in February by the well-known consulting firm McKinsey & Company showed that both the absolute and relative levels of global debt today significantly exceed the levels just before the start of the financial crisis. In 2007, global debt equalled $142 trillion, or 269 per cent of global GDP. By 2014, global debt had grown to $199 trillion, or 286 per cent of global GDP. In 2007, according to the McKinsey report, there was a major hotbed of global financial instability in the world – the US – where a huge bubble had been inflated on the mortgage market due to the greed of Wall Street banks and the tolerance of financial regulators. When this bubble burst, it became the epicentre of the global financial crisis. As noted in the McKinsey report, there are three hotbeds of global financial instability today: the United States (again), Europe (which has been in a permanent debt crisis since 2010) and China. With regard to China, however, nobody knows how big the country’s financial bubble is. Most of the credit for its inflation belongs to shadow banking institutions (‘shadow banking’), which has become widespread in China. They are outside the effective financial control of the state and the latter does not really know the extent of the debt incurred.
Judging by the information available, discussions on the second item on the agenda will take place in the same way they always do at summits like these. It will be a conversation about nothing. As the experience of previous financial summits shows, their participants pay absolutely no regard to the decisions taken at meetings of the G8 and the G20, and joint meetings of the IMF and World Bank in 2008-2009. In the atmosphere of financial panic and fear that existed back then, extremely harsh decisions were made at these meetings, to the point of nationalising ‘systemically-important’ banks. The relative stability of the global financial situation from 2010 onwards, however, turned these forums back into talking shops. Moreover, a serious discussion regarding measures to prevent a second wave of the global financial crisis will clearly be unproductive without China, where one of the three potential epicentres of the crisis is thought to be.
There has been much speculation in the foreign media about whether the debt situation in a number of specific countries, primarily Greece and Ukraine, will be discussed at Dresden. Berlin has previously stated that the Greece issue will be discussed ‘upon request’. Given that the possibility of resolving the Greek debt crisis will have a huge effect on the situation in the European Union and particularly in the eurozone, it is not inconceivable that such a request may be initiated by France or Italy. Just before the summit, Germany’s Federal Minister of Finance, Wolfgang Schäuble, told German media that the issue of Greek debt was “sure to be on the agenda” of every official gathering in Dresden, including the chair of the Eurogroup (the council of eurozone finance ministers) Jeroen Dijssselbloem, the head of the European Central Bank Mario Draghi, and the European Commissioner for Economic and Financial Affairs, Taxation and Customs, Pierre Moscovici.
Ukraine is very much hoping that the summit in Dresden will give Kiev at least political support regarding the restructuring of its debt. As you know, talks on sovereign debt restructuring between Kiev and the private holders of Ukrainian bonds have already been going on for a long time and it seems they have finally reached an impasse. By the start of the summer, Kiev needs to have submitted a decision to the International Monetary Fund on restructuring (read: writing-off) $15 billion dollars. There is no decision, however, and there is no prospect of one.
The situation is complicated by the fact that Russia is not planning to take part in the restructuring process and is clearly intent on receiving $3 billion by the end of the year to repay the Ukrainian bonds it bought in December 2013. In terms of the unstable situation in Kiev, this amount is critically important. But as experts have noted, Russia is not going to be at the summit, so there is not expected to be any kind of specifics about Ukraine’s debt.
And, finally, the third item on the agenda regarding financial terrorism. Many Western media outlets are saying that this will be the main issue at the meeting. First and foremost, the West is becoming increasingly worried about the situation in the Near and Middle East, where the rise of the so-called Islamic State (IS) has taken many by surprise. Every terrorist group in the past pales in comparison with IS. Previously, the financing of terrorist groups was measured in the hundreds of thousands dollars, but the financing of IS is being measured in the hundreds of millions of dollars. And while cash was previously used almost exclusively to finance terrorism, it now turns out that banks and companies based on non-cash payments are financing IS through complex schemes. The West has still not managed to adapt to the challenges of IS. It is expected that Paris and Berlin will put forward specific proposals at the Dresden summit to freeze the assets of companies, banks, and even entire countries suspected of aiding terrorism. In the EU, France and Germany have already set about developing a Europe-wide system to freeze assets. There are also measures currently being prepared in the EU aimed at controlling the movement of gold, precious stones and other anonymous payment methods, and bringing order to the antiques trade and the exchange of banking information, and Paris and Berlin will offer support for such measures to be initiated in the other G7 countries.
With regard to the fourth item on the agenda, this has already been discussed numerous times at previous summits, and as part of the discussion on taxes, the subject of offshore companies will once again be raised. There has not yet been any mention of the specific decisions expected on this issue.
In addition to the stated agenda items, other issues are also expected to be discussed. Experts believe that these extra issues will probably include a discussion regarding economic sanctions against Russia.
An outstanding feature of the meeting in Dresden (compared with previous summits) will be the involvement of more than ten leading international economists in discussions, including former US Secretary of the Treasury Lawrence Summers. Their contribution will largely be needed when discussing measures to stimulate global economic growth.
The work of the financial summit will not be widely publicised, and nothing will be known of its outcome until the closing press conference on 29 May.