Closing Press Conference by the
G7 Finance Ministers and Central Bank Governors
May 29, 2015, Dresden
Ladies and gentlemen, I think that one can say that it has been a most successful meeting of the G7 finance ministers and central bank governors here in Dresden. At first we were not sure whether it would work out, such a meeting, but I always trusted that Dresden is the right place to host such a meeting and I am sure one can say that it was, and therefore let me start by thanking the city of Dresden and the organizers in the city here and the free state of Saxony for the hospitality extended to us and for letting us use the beautiful royal palace and the nice setting and surrounding here was certainly conducive for our intensive and constructive talks. First I was hopeful that Dresden would be the right place for such a meeting, and now I know for sure.
And just one more introductory remark, let me point out that this event was held in a climate-friendly manner, and just look at the weather, which proves my point. But this is just off the record.
It's the first time at a G7 finance ministers, we invited renowned economists to have a symposium and I would like to thank Alberto Alesina, Jaime Caruana, Martin Helwig, Kenneth Rogoff, Nouriel Roubini, Robert Shiller and Lawrence Summers for accepting the invitation for joining us here yesterday morning during the symposium where we had constructive discussions and I think we can say that such an experiment of the symposium has been worth the effort. Now of course the economists didn't agree on everything, nor the central bank governors, nor the ministers but this is not the purpose of a discussion. It was an intensive and sometimes controversial discussion but very fruitful and helpful and therefore it provided the basis for our discussion among the G7, where we talked about how to boost economic growth and how to increase the resilience of the global economy. There was full agreement on the need for structural reforms and given the fact that in the past many people had been asking us to stimulate demand, this is a huge success now that there is agreement on the need for structural reforms: that is ambitious structural reforms in order to stimulate private sector investment in order to increase productivity as well as to promote research and development. I think this is important to remember since despite all the differences on fiscal policy in Germany we did increase spending on research and development in the federal government over the last five years by 50%. There's also a need for public investment and public investment should be well targeted and should have a clear focus on education and infrastructure.
Then we talked about sustainable growth and we agreed that sustainable growth requires sound public finances. Looking at demographic trends in G7 countries, this will require us to reduce public debt and public deficits, because we have to address the big challenges ahead of us, one of them the aging population. Another trend is digitization — what does it mean the digital change we are faced with, what will it entail with regard to growth prospects and what does it mean — and here we started the discussion with what does it mean to our tax regimes? It will enter enormous challenges, this digitization of societies and economies and it was just crucial to have a debate on this issue at an early stage and to do so more frequently.
Now, with regard to international cooperation in tax matters, there is consensus that the more we cooperate the better we are in a position to achieve fairer taxation, which is our objective — to secure tax revenues to increase fairness. This is true for Germany but for other countries too. There are various projects under way at the G20 level that have been initiated by the G7. Let me just mention the BEPS initiative, which will be finalized by the summit later in the year. And there is agreement on the automatic exchange of information, where in fact we have been making a lot of progress, much more progress than anybody would have expected three years ago. We also agreed that we now have to implement what we have agreed. This is an example, I think, that shows that it may be tiresome at an international level to make progress, but it is possible. It is feasible.
But we also look beyond the current BEPS agenda and we agreed that we would continue to work on improving and enhancing cooperation between our tax administrations. We also agreed that we need a mechanism for a dispute settlement between national tax administrations, that we want to intensify cooperation by making better use of international information networks, and that we should also work towards joint audits to have audits carried out jointly by different tax administrations. This means that we have to make progress not just with regards to the rules but also in everyday tax administration. Finally, with regard to tax, we also want to bring in developing countries. They should be part and parcel of our international tax agenda. We want to help them in building up their tax capacities supported by the World Bank, and this is something we will present to the summit because it's important to make sure that developing countries have sufficient tax administrative capacities and should be an important part of any other type of development assistance provided to developing countries.
Then we talked about how to find terrorist financing with very intensive debate on this. This includes, among other things, the swift freezing of assets if necessary. It implies more transparency with regard to financial flows, also with regard to virtual currencies and new types of payment.
And we have talked about a new initiative to be presented with regard to Nepal. We stand ready to provide further emergency support. We talked about this with the IMF managing director Christine Lagarde. We looked into the financial requirements to be given to make sure that such future disasters can be prevented — an issue the World Bank president of course is involved, given his huge expertise in this matter. With regard to Nepal, as I said, we stand ready to provide further support and assistance, including financial assistance and including possibly debt relief.
On the issue of Greece, we informed our partners on the current state of affairs but we only dedicated a few minutes on this particular issue. Commission Moscovici reported on the state of negotiations between the three institutions and the Greek government, and what he reported or told us is in line with what we always hear: that is the positive news we get from Greece do not fully correspond with the state of negotiations between three negotiations and Greece.
We also talked about Ukraine and we are ready to do everything in our power to support Ukraine in its ambitious reform agenda. Of course the Minsk agreement needs to be implemented, which does not fall within the remit of finance ministers of course, but we also agreed that we will try to support the negotiations on the restructure of Ukrainian debt, which must be brought to a successful conclusion.
Finally, we had an exchange on the establishment on the new Asian Infrastructure Investment Bank. We all wish this bank every success and we also wish the bank will become operational in line with best practices concerning governance and other standards, and the way it looks everything is running smoothly.
And finally, we also talked about the possible addition of the renminbi to the SDR basket of the IMF, and there was agreement that we would welcome such an addition in principle as long as it's in line with the existing criteria so there are no divergent views on this.
And therefore, taken together, I think one can say that overall that we have paved the way for a successful G7 summit to be held in Elmau soon.
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Ladies and gentlemen, I too would like to extend a warm welcome to all of you attending our presidency press conference. I would also like to thank all those who have organized this meeting and who have made their contribution that it has been such a success.
As Minister Schäuble said, one of the innovations during our meeting was that for the first time, quite unprecedented, we had a symposium with renowned economists on the issue of how to improve growth prospects in the global economy, where do we stand economically, and what can we do in order to move towards a more dynamic global economy, which is one of the central of the key challenges we need to address. There was a broad range of opinions voice during this symposium. The discussion also then provided an input into the G7 discussions proper, so it was certainly stimulating the discussions between ministers and central bank governors.
I would now like to focus on two issues in particular, which were on the top of our agenda. Firstly, how can we make the global economy more dynamic, and how can we build a sound and stable financial system. In our discussion on the global economy we did not just look at the short-term outlook for growth, but we also talked about longer term challenges that need to be addressed in order to boost growth and to increase the resilience the global economy. This is a very important discussion to have not only because the short-term outlook for growth is muted and growth is uneven within the group of the G7 countries. We also talked about this issue because it is longer term growth xxx that have dimmed in recent years and therefore have to be tackled. The fact that we have seen many disappointments in recent years over global economic growth and therefore there have been corrections by the IMF to growth forecasts, I think this shows that we cannot blame the development to bad luck or special circumstances only. I would rather say that there were more systematic forces that have been at work, both on the demand side and on the supply side of the world economy, and these factors were already having a dampening impact on economic growth, even before the global economic crisis erupted. Therefore we have seen the dampening impact, which confounded the crisis, if you like.
Among these forces are for instance demographic developments as well as decline in productivity growth, as we see it at the present juncture. However, there might have been other factors too at play which have resulted in the situation where global potential growth has weakened noticeably in recent years.
As the minister said, the participants of the G7 finance meeting agreed that it is necessary to both balance supporting demand and embrace structural reforms always depending on country-specific conditions. We concurred that innovation, investment and adaptability are the foundations for dynamic economies and sustained growth, and therefore we agreed and reaffirmed our commitment to implementing ambitious structural reforms. There was also agreement that it is better to start structural reforms now instead of waiting for a point in time which is assumed to be better but which might never materialize. Of course structural reforms need time to yield their intended or desired outcome and therefore we have to act now.
There was also agreement that sound public finances and sustainable growth and resilience are not a contradiction but on the contrary sound public finances are an essential precondition for sustainable growth and resilience.
Then we talked about monetary policy within the G7, which needs to be pursued within the mandate of our central banks, and that it should aim at supporting the economic recovery as it now does, and with regard to financial market stability we will monitor financial market developments carefully and are mindful of the risks of elevated asset prices.
Two sub-items of this discussion concerned the recent sharp increase in long-term government interest rates that we have seen recently, where participants agreed that this was a correction of the overshooting before, especially on bond markets. We also saw how financial agents responded to — the operators on the markets responded to this increase. This is something we discussed and we also said that because of the long-term low-interest environment, certain risks are materializing, also in the insurance sector for instance.
Now, with regard to the international financial system or architecture, there was agreement among ministers and governors that we have made important progress in building a stronger and more resilient financial system in particular by strengthening the soundness of the banking sector. However, we also shared the view that this job is not finished yet — that is, the financial market agenda and therefore we quite explicitly reaffirmed our support for the G20 financial regulation agenda as well as our commitment to finalizing and implementing agreed reforms fully, timely and consistently.
One key pillar of the reforms are the rules for regulatory capital that aim at ensuring sufficient loss-absorbing capacity. Sufficient total loss-absorbing capacity, or TLAC for short, is an essential component to putting an end to what is called the too-big-to-fail problem in particular with regard to global systemically important banks. In other words, setting a binding TLAC level is crucial for insuring the credible and effective resolution of ailing banks without jeopardizing the stability of the financial system as a whole.
We are fully aware of the fact that increasing the capital ratios of major banks requires substantial efforts. However, if the capital position should be improved it will drive down the per-unit costs of capital for banks, which will help to curtail the impact of tighter capital regulation on credit rates.
The G7 are strongly committed to the work undertaken by the FSB and want to set credible standards for the TLAC of systemically important banks at the Antalya G20 summit later this year, following the conclusion of comprehensive impact assessments. These new rules will further shield tax payers from any losses if these banks fail.
Furthermore we talked about the shadow banking picture and how to strengthen the regulation and oversight of shadow banking in order to address the systemic risks attached to this banking sector in order to avoid fragmentation and arbitrage. Various recommendations have been issued recently, how to transform the shadow banking and how to make sure that market-based financing does not produce further risks and that the financial markets still can fulfill their role in supporting the real economy.
The G7 also welcome the deliberation by the Basel Committee on the appropriate treatment of sovereign exposures within banking regulations. So far sovereign bonds have been treated as risk-free assets despite historical evidence to the contrary. If so sovereign debt is not risk free, its current regulatory treatment or principles are really a contradiction to the very spirit of the Basel capital regime, which states that any risk should be adequately backed by capital. Therefore we look forward to receiving considered recommendations from the Basel Committee in due course, although we are fully aware of the complexity of this technical matter, which will also have an impact on liquidity regulations and insurance supervision. But personally, I very much appreciate that the topic is on the agenda now and there is a growing consensus among policy makers that the current regulatory treatment of sovereign debt needs to be reviewed.
Finally, let me mention another topic we talked about. Recently there have been various circumstances or cases where the financial industry was accused of misconduct and where massive fines have been imposed, which has a huge impact on society. This behaviour also had an impact on the resilience of the financial industry as a whole. This is related to the mindset within the financial industry, but it is also due to the misconduct or behaviour of individuals and therefore it's about individual integrity and good conduct. It's about individual liability and liability of the industry as a whole. Against this background we see considerable merit in establishing a bankers' code of conduct in collaboration with the relevant international bodies and, in fact, encourage the FSB to start working on the drafting of such a bankers' code of contact. Having said that, it is also clear that regulation can only set limits, but individual integrity and good conduct focusing on the role played by banks in the economy is beyond the reach of regulation. So what it boils down to really is a voluntary self-commitment to be made by the financial industry, and given the internationalized financial industry this should be an international initiative.
Source: Federal Ministry of Finance, Germany