Key take-aways from the G7 beyond the tax deal
The US on the backfoot on fiscal policy, the EU overtaken on sustainable finance and global tax deal with a lot of implementation risks
The G7 of Finance Ministers statement was quite important and substantial for the first time in quite a while highlighting a much-needed return to some level of multilateral and international policy coordination. The part that got the most attention, the agreement on the taxation of multinational companies, has stolen the light to a number of other equally, if not more important issues.
Global tax deal
· On the tax issue, there was quite a bit of push back against my rather sceptic take on this deal. It is fascinating to observe that:
o Europeans (in particular France and Germany) are convinced that they have been battling for international tax harmonization for years and deserve the credit.
o Americans believe that the EU has been siphoning off vast amount of US corporates tax resources because of its arcane tax arrangements that provide the venue for the aggressive tax avoidance of multinational corporations.
· The reality is that both narratives are true, and that the US and the EU have a symbiotic and corrosive tax relationship. The EU, who likes the sound like the good multilateral player has truly become the largest venue of international tax avoidance in the world. And US companies, in particular its digital behemoths, are the greatest beneficiaries.
· The deal is important nonetheless because it provides a basis for future improvements but it first needs to be implemented. I worry greatly that the fact that the US was forced to retreat so quickly from its original 21% minimum to 15% because of a lack of domestic and international support will set a bad dynamic at the G20 and the OECD.
· Indeed, the early reactions to the G7 by Irish Finance Minister (also happens to be sitting president of the Eurogroup) was not exactly enthusiastic. He only took note of the decision by G7 Finance Ministers and reminded that all 139 countries of the OECD inclusive group on taxation needed to opine. And it is worth remembering that once agreed at the OECD, the agreement will need to be legislated where once again veto rights threaten everything. It is therefore somewhat concerning that neither France nor Germany publicly backed the US 21% proposal, and that the EU didn’t come to G7 with a strong and united position on the matter.
· So I stand by my rather skeptical view on this deal, a great symbol but many obstacles ahead and limited political support as far as I can see.
CBDC and Stable coin
§ Perhaps unnoticed, the language on CBDC was bolder than I thought paving the way for strong international coordination between G7 central banks. The cooperation has so far mostly taken the form of a BIS hub spearheaded by Benoit Coeure, but there seems to be more political goodwill invested now than there ever was.
§ This is also a reaction to private coin initiatives, and after bold steps by China on this front, the G7 language against the use of Stable Coin is a lot more explicit than I would have thought.
We reiterate that no global stablecoin project should begin operation until it adequately addresses relevant legal, regulatory, and oversight requirements through appropriate design and by adhering to applicable standards.
§ I continue to be of the view that advanced economies will eventually follow the footsteps of China and largely regulate private digital currencies away from the market for a mix of transparency, financial stability and climate reasons.
Sustainable Finance Agenda
The sustainable Finance Agenda is normally more a G20 track negotiation, so it was interesting to observe so much language in the G7 Communique highlighting the battle that are already taking place essentially between the EU, the US and the UK.
Several things stand out:
§ A more ambiguous commitment to climate pricing / taxing with a language that refers to : optimal use of the range of policy levers to price carbon. This is potentially an important departure from placing carbon price at the center of the international cooperation agenda.
§ Mandatory climate related disclosures to ensure consistency. What is striking here is the firm reference to the TCFD, which would become the global template while the current disclosure rules that are being legislated in Europe (SFRD and NFRD) are not rooted in the TCFD methodology. It is not clear how much space for domestic deviation there will be as the statement suggests a methodology: based on the Task Force on Climate-related Financial Disclosures (TCFD) framework, in line with domestic regulatory frameworks.
§ Recognition of the need for international financial reporting standards for these disclosures. The International Financial Reporting Standards Foundation’s work is viewed as central to accelerate convergence giving it a leading role. Interestingly, the G7 wants to establish an International Sustainability Standard Bord as part of the COP26 providing a strong momentum for convergence and harmonisation of carbon disclosure standards.
§ What is striking is also what is missing, the word “taxonomy” is not present at all in the statement, suggesting that this European and rather prescriptive approach to sustainable finance is not endorsed by the international community.
All in all, what seems to emerge from what was and remains a highly fragmented landscape is a great push for convergence around a few principles and instruments:
o greater disclosures to enable markets to deliver carbon related price signals rather prescriptive rules
o central role of the TCFD framework, which is rather flexible and largely influenced by the financial sector
o greater standardization of carbon accounting and disclosure standards with a leading role given to the IFRS with a view to create a new Sustainability Board.
It is striking to note that while the EU had heavily invested in the sustainable finance regulatory agenda, most of its original contributions are not making it to the international consensus that is shaping up.
Fiscal policy
§ Last but not least, the language on fiscal policy has been the object of quite few debates in the weeks leading up to the Ministerial meeting. Interestingly, the UK is emerging as the strongest voice for fiscal conservatism internationally in a bid that is very reminiscent of the influence that the Conservative Government (helped by the Bank of England) had after the 2010 on the international fiscal policy consensus.
We commit to sustain policy support as long as necessary and invest to promote growth, create high-quality jobs and address climate change and inequalities. As our economies re-open, we will continue to take steps to limit the uneven impact of the crisis by targeting support to where it is needed most. Once the recovery is firmly established, we need to ensure the long-term sustainability of public finances to enable us to respond to future crises and address longer-term structural challenges, including for the benefit of future generations.
§ The US has not been able to push for geater international fiscal expansion and has only been able to do some damage control by asking that concerns over long-term sustainability are postponed until after the recovery is firmly established.
§ Given that the appreciation for such a recovery remains national, the US is effectively on the backfoot, and it has not managed to introduce language about global imbalances that could have strengthened its hands to demand for international action.
§ All in all, this is not a set up that is prone to international economic policy coordination in favour of greater international fiscal expansion. In fact, the language at the G20 might be even a touch more conservative enshrining existing fiscal policy and macroeconomic divergences internationally.
Here again, the EU didn’t push for a more aggressive language in support of the recovery.