G7: Two Pledges of Fiscal Stimulus Support

Published on February 10, 2021
SGH Insight
G7 Finance Ministers and Central Bank Governors will meet virtually on Friday, February 12, under the chairmanship now of the UK, which just took over its rotating presidency for 2021.

** According to various sources, senior G7 financial policymakers expect to discuss enhanced coordination of fiscal stimulus in response to the Covid-19 pandemic – who does what and for how long – and to reaffirm their commitment to supporting their respective economies and to averting a situation in which a premature or unexpected withdrawal of fiscal stimulus, especially in one of the major economies, could hurt the others.

** There is also likely to be discussion on Friday of boosting the International Monetary Fund’s war chest by an additional 500 billion Special Drawing Rights (SDRs), as proposed by IMF Managing Director Kristalina Georgieva last year, or, more controversially, by an even larger amount – as high as the 1-2 trillion SDRs that has been suggested for example by former US Treasury Secretary Larry Summers. The purpose of these additional lines would be to help the IMF assist smaller countries around the world with additional financing needs arising from the pandemic.
Market Validation
Policy Validation

(Reuters 2/12/21)

ROME — Finance ministers from the Group of Seven (G7) rich nations have committed to continuing coordinated action to support the economy, Italian Economy Minister Roberto Gualtieri said on Friday.

“G7 ministers confirmed today their common and coordinated commitment to support the recovery and to set the conditions for a sustainable and inclusive growth. The withdrawal of policy support is premature,” he wrote on Twitter after an online call with his G7 peers.

(National Post 2/12/21)

Japan's Aso: G7 finmins discussed support for low-income countries

Financial leaders from the Group of Seven (G7) rich nations discussed support for low-income countries and new allocation of special drawing rights at the International Monetary Fund (IMF) in a virtual meeting, Japanese Finance Minister Taro Aso said on Friday.

Aso was speaking to reporters after attending Friday's online meeting with his G7 peers under the United Kingdom as new chair.

(Bloomberg 2/12/21)

In her first call with foreign counterparts and central bankers from the G-7, Yellen said that “the time to go big is now” and that the group should focus on how to help the economy, the U.S. Treasury Department said in a statement after the virtual meeting held on Friday. The U.K. is the rotating head of the G-7 this year.
The U.S. is leaning toward backing an increase in the IMF’s special drawing rights by as much as $500 billion, Bloomberg News reported earlier this month. The fund has been lobbying for more help to support developing nations against the Covid-19 crisis. A decision could come as soon as this month.

G7 Finance Ministers and Central Bank Governors will meet virtually on Friday, February 12, under the chairmanship now of the UK, which just took over its rotating presidency for 2021.

** According to various sources, senior G7 financial policymakers expect to discuss enhanced coordination of fiscal stimulus in response to the Covid-19 pandemic – who does what and for how long – and to reaffirm their commitment to supporting their respective economies and to averting a situation in which a premature or unexpected withdrawal of fiscal stimulus, especially in one of the major economies, could hurt the others.

** There is also likely to be discussion on Friday of boosting the International Monetary Fund’s war chest by an additional 500 billion Special Drawing Rights (SDRs), as proposed by IMF Managing Director Kristalina Georgieva last year, or, more controversially, by an even larger amount – as high as the 1-2 trillion SDRs that has been suggested for example by former US Treasury Secretary Larry Summers. The purpose of these additional lines would be to help the IMF assist smaller countries around the world with additional financing needs arising from the pandemic.

Welcomed by Biden Administration

Regarding the pledge for continued fiscal stimulus, the cynic might rightly note there does not appear to be any prospect for the removal of that support any time soon anyway. But an explicit endorsement of keeping the taps open by the forum for the world’s major industrialized countries will certainly come at a welcome time for the administration of US President Joseph Biden, which is marching full steam ahead towards pushing a massive $1.9 trillion spending package through Congress via the more politically charged budget reconciliation process.

As is often the case in the more deliberative G7 process, it is not yet clear if there will be a formal statement on the need for continued fiscal stimulus after Friday’s meeting or some less formal way of communicating the policy commitment. Officials expect there will be an agreement of some sort among the G7 countries on no premature exit from pandemic stimulus.

Regarding the IMF SDRs, the administration of former US President Donald Trump, and then Treasury Secretary Steven Mnuchin, had in the past blocked all attempts at expanding the IMF SDR capacity, as a broader reflection of its America First priorities and agenda, but also in large part to prevent China and Iran from receiving US funded assistance through that transnational body. With President Biden and Treasury Secretary Janet Yellen now at the helm, there is growing expectation among European officials that a more globalist US administration will now support that effort.

Proposing more money for the IMF is nevertheless always a politically charged affair in Washington, and recognizing that, the idea floating within the G7 is to get an agreement on boosting the SDRs out of the way as soon as possible to give the US Congress, which has a 90-day review for any such move, sufficient head start to act. From what we understand, that means a formal decision on the SDRs could be taken at the IMF’s Spring Meetings in April.

 

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