Default and bank tremors
G7: Economic prospects have become more uncertain
05/13/2023 2:13 p.m
The finance ministers and central bank governors of the leading industrialized countries are warning of a clouding of the economic outlook and are urging them to be vigilant. This should make supply chains more stable and reduce one-sided dependencies. Concerns about a US insolvency are hovering over the meeting in Japan.
The seven leading industrial nations (G7) warn of increasing uncertainty for the global economy. The finance ministers and central bank governors, including Federal Finance Minister Christian Lindner, said in Niigata, Japan, that one must remain vigilant and flexible, as the uncertainty for the global economic outlook has increased. The meeting was overshadowed by concerns about an impending US default, the recent banking turmoil and the consequences of the Ukraine war.
US Treasury Secretary Janet Yellen said in Niigata that she still hopes for a solution to the US debt dispute. The negotiations between the ruling Democrats around President Joe Biden and the Republicans are more difficult than in the past. However, she hopes that an agreement will be reached and that a US payment default will be avoided. The US government itself has already warned of a possible financial and economic catastrophe if the problem is not solved. UK Treasury Secretary Jeremy Hunt said it would be “absolutely devastating” if the US failed to reach an agreement. However, the debt dispute was not mentioned in the G7 communique.
G7 takes on banking supervision
The meeting in Niigata also served to prepare for the G7 summit in Hiroshima, which is due to begin in a few days. Yellen said Biden wants to attend there. He can also cancel the trip if the situation in the debt dispute requires it. In the USA, there is a regular increase in the upper limit for government borrowing and this often leads to political wrangling between the parties. This time, however, observers are warning of an aggravated situation. Democrats want an unconditional hike. The Republicans have said they will only agree to drastic spending cuts.
Following the recent financial market turmoil following problems at several US regional banks, the G7 pledged to fill gaps in banking supervision. Overall, the financial system is resilient. The lessons of the 2008 global financial crisis – higher capital and liquidity requirements – continued to provide stability.
The G7 also said they wanted to make global supply chains more resilient. Collaborations are currently being worked on with interested emerging and developing countries. The World Bank and other international organizations are also on board. A program for implementation should be launched by the end of the year at the latest. Emerging and developing countries should play a more important role, especially in new supply chains for climate-friendly products. In the corona pandemic and because of the consequences of the Ukraine war, many supply chains of large corporations have broken. Above all, Germany wants to reduce its dependence on China in trade and on Russia in the energy sector.
Ukraine war a major risk
A US idea to consider targeted restrictions on investments in China was not mentioned in the 13-page final document. However, it was said that the G7 countries would work to ensure that foreign investments in critical infrastructure do not “undermine the economic sovereignty of the host countries”.
The G7, which includes the US, Canada, Japan, the UK, Italy, France and Germany, once again condemned Russia’s attack on Ukraine. Ukraine can count on aid as long as it is needed. The international community has increased its pledges for Ukraine’s budget and other economic aid to $44 billion for 2023 and early 2024. However, an end to the war would eliminate one of the greatest risks for the global economy, it said. Reconstruction in Ukraine would then also require private money, for which there could be state security. A reconstruction conference in London in June will play an important role.