Statement by Minister of Finance in Sweden Bosse RINGHOLM, in his capacity as Chairman of the EU Council of Economic and Finance Ministers, to the IMFC Spring 2001 meeting 29 April 2001
1. I submit this statement in my capacity as Chairman of the EU Council of Economic and Finance Ministers. It focuses on three themes: how best to integrate developing countries into the global economy, including the fight against poverty; how to strengthen the international monetary and financial system; and how best to fight against financial abuses. It also considers recent economic developments in the world and in particular within the EU.
2. Let me first, however, welcome the Federal Republic of Yugoslavia as a member country of the IMF. This is a great pleasure for the EU, not least because Fund membership now includes all major countries from the continent of Europe.
Fostering the integration of developing economies in the globalised world
Globalisation contributes to growth
3. The international mobility of goods, services and capital has brought tremendous opportunities for growth and development throughout the world, and must continue to play a vital role in contributing to rising prosperity, in particular in emerging economies and developing economies. At the same time, the EU recognises that the process of globalisation, like any economic transformation also poses economic and social challenges. It also increases the potential for vulnerability of national economies to international financial contagion. Therefore, a number of actions are needed to reduce the risks posed by globalisation and to ensure that the benefits of globalisation are shared by all.
4. The ultimate responsibility for maximising the benefits and reducing the risks of globalisation lies with countries themselves. Governments have a crucial role in three inter-related fields: (i)- formulating and implementing policies to secure macro-economic stability and sustainable growth; (ii)- promoting financial stability through improved financial sector regulation and supervision and debt management; and (iii)- designing and implementing `social safety nets' that protect the most vulnerable groups during the process of liberalisation. However, the IFIs should work with their members to minimise the risks inherent in the globalisation process and ensure that all countries, including the poorest, are able to participate in, and benefit from the global economy. Moreover, enhanced co-operation between all relevant international institutions will help to deliver growth for the benefit of all.
Ensuring full implementation of the internationally agreed standards and codes
5. In this context, the EU strongly urges all countries, in particular those participating in global capital markets, to take steps to implement internationally agreed standards and codes. Continuing support should be provided in order to facilitate their implementation in a manner that reflects each country's unique development, reform priorities and institutional characteristics. Where not yet done, individual action plans should be drawn up, according to the priorities identified in consultation with the IMF. The implementation of Reports on the Observance of Standards and Codes can have an important role in helping the countries concerned to improve their policies and in promoting the flow of information to markets, and more crucially, in improving the economic performance of the countries themselves adopting the standards. It is therefore important that assessment of progress in implementing standards and codes become a component of the Fund's surveillance. In addition, further efforts are needed to increase market participants' awareness of standards and codes. The EU welcomes the progress achieved in a number of IMF member countries, in particular the successful experience so far in preparing, and publishing, Reports on the Observance of Standards and Codes.
Properly prepared and well sequenced financial liberalisation
6. Similarly, the IMF has a central role to play to assist member countries to carry out orderly and properly-sequenced capital account liberalisation. Capital account liberalisation conducted in the appropriate manner is inherently beneficial, as it favours private investment and promotes general economic development. Since capital account liberalisation can increase countries' external vulnerability, it must be well-sequenced and backed by stable and credible macro-economic and structural policies, sound risk management practices and effective supervision. The Fund should take steps to foster its involvement in these issues, including by drawing lessons from experience, and its policy advice on these matters should take due account of different countries' circumstances.
7. The EU invites the IMF to develop in close co-operation with the World Bank and the OECD, a flexible framework for capital account liberalisation, which could highlight the linkages between individual codes and specific liberalisation measures. In order to make this framework operational, we should resume our reflections on amending the Articles of Agreement so as to provide the IMF with an appropriate legal basis.
Promoting regional integration and exchange rate co-operation
8. Regional co-operation, possibly including monetary and exchange rate co-operation, can play an important role in fostering the integration of emerging market countries into the world economy. For open economies, economic development often has a regional dimension. In particular, as also discussed in Kobe in the framework of the ASEM Finance Ministers meeting, regional economic and monetary integration can promote stability, as exemplified by EMU and the ongoing enlargement process. This is particularly the case when they have strong trading relationships and have made sufficient progress towards economic convergence. Moreover, provided that members of regional integration arrangements are committed to strong and effective multilateral co-operation, regional integration can be a building block towards a more efficient and coherent international economic order. Therefore, regional arrangements should supplement the existing IMF and WTO frameworks.
Developing a comprehensive strategy to fight against poverty
9. The EU welcomes the results achieved so far within the enhanced HIPC initiative. Twenty-two countries have already reached their "decision point" and have now started to receive significant debt relief. We also urge all creditors to provide, on a timely basis, their share of debt reduction under the enhanced HIPC initiative, and encourage bilateral creditors to go beyond the HIPC targets, by agreeing to commit to provide 100 percent reduction of ODA debt and eligible commercial debt.
10. The EU considers debt reduction to be only one element of a comprehensive strategy for poverty reduction. Most important, development has to start with and by the countries themselves. Sound economic policies and public financial management, as well as more efficient domestic resource mobilisation through market-oriented reforms, represents the first pillar of any poverty reduction strategy. Within country-owned poverty reduction strategies, resources need to be channelled in a more efficient and co-ordinated way to the social sector, in coherence with the objectives contained in the 2015 International Development Goals.
11. A second fundamental pillar hinges on developing effective trade- and investment-related policies, for example to reduce the domestic regulatory barriers that hamper the expansion of exports and investment and enable countries to benefit from international capital flows and aid flows. A favourable international environment for investment and trade is also important. The EU has led the way by recently adopting an initiative aimed at liberalising market access for all products from the world's poorest countries except military weapons. In addition, a new multilateral trade round should be launched in the WTO framework at the 4th WTO Ministerial Conference in Doha scheduled for November 2001, and both industrial and middle income countries need to further open their markets to exports from the poorest countries. As noted by EU Heads of State and Government in their recent meeting in Stockholm, the new round, which would make a major contribution to global economic growth, should respond to the interests of all WTO members, in particular developing countries, and should be prepared in a transparent and inclusive manner taking into account the need for a dialogue with civil society.
12. The IMF and the World Bank play important complementary roles in fostering the world's economic growth and stability. Closer co-ordination between the Bretton Woods institutions and other international and donor organisations is crucial. Within this framework of close co-ordination, it is essential that the IMF, particularly through its Poverty Reduction and Growth Facility, continues to ensure that macro-economic frameworks and sound public expenditure management systems, both directed towards a sustainable balance of payments position and compatible with the delivery of poverty reduction, are put in place. It should be noted that PRGF-supported programmes are derived from, and reflect overall national-led development. Further steps in enhancing co-operation with the World Bank and MDBs are also necessary to ensure more efficient conditionality. In this regard we welcome the progress in this direction made with respect to countries supported by the PRGF, and look forward to further steps that would facilitate more generally more effective co-operation.
Strengthening the international monetary and financial system
13. Progress in strengthening the international monetary and financial system has been achieved in recent years, and the important responsibilities of pursuing policies aimed at reducing vulnerabilities and implementing internationally agreed codes and standards has been shouldered by member countries. Member countries, nevertheless, still need to take further steps together within the IMF to strengthen the international monetary and financial system. I will address three of them: improving the Fund's governance; better focussing the conditionality attached to the use of the Fund's resources; and enhancing the private sector's involvement in the prevention and resolution of financial crises.
Continuous improvement in Fund's governance
14. The EU Member States believe that future work on IMF quotas should be conducted in the context of continuous improvement of Fund governance, in line with the main guiding principles supporting the central role of the IMF in the international financial system:
15. The quota system is only one element in ensuring effective Fund governance. In particular, the voting system and the majority rule should aim at universal legitimacy and representation. In this context, constituencies must continue to be allowed to be formed freely and organised so as to ensure that all members are adequately represented. The system should be flexible enough to enable large constituencies to serve effectively the interests of their members.
Conditionality in Fund-supported Programmes
16. The Fund's financing is intended to support a member country's policy programme, with adjustment policies and financing together forming an integrated response to the country's economic difficulties. In this context, the EU welcomes the current discussion on streamlining and focusing conditionality in Fund-supported programmes and reaffirms the need for efficient conditionality, both in the macroeconomic and structural fields. We encourage the Fund to continue its work on this issue and to develop a proposal for a revision of the conditionality guidelines. Any revision should be based on the following general principles: i) national ownership is a key component of the successful and sustained implementation of any programme of economic policies; ii) conditionality should take due account of the specific circumstances of the debtor country; iii) the test for inclusion of a policy measure, including structural reforms, in Fund-supported programmes should always be whether it is necessary for macroeconomic and financial stability; and iv) Fund conditionality should be streamlined and focused to enhance effectiveness of Fund-supported programmes whilst safeguarding IMF resources. In this vein, the EU would encourage the Fund to undertake periodic reviews of its conditionality.
Private Sector Involvement : from general principles to implementation
17. The EU welcomes the progress achieved so far in the development of a framework on PSI as reflected in the principles agreed upon at our Prague meeting. Both these principles and the Fund's approach towards the resolution of recent crises have made the private sector more aware that PSI should be a standard element of crisis resolution, thereby creating the incentives for lenders to make more thorough risk assessments. However, more work needs to be done to ensure transparent, consistent and coherent implementation of the agreed PSI framework. Furthermore, on the basis of experience, the current framework might need to be further strengthened and made more predictable to market participants, so as to strengthen crisis prevention.
18- In particular, concrete steps in the following areas should be taken:
Furthermore, given the quantitative limits on access to IMF resources, financing beyond those limits should be made available only in truly exceptional cases involving in particular substantial risks of contagion with systemic effects, and should not be open ended. The EU invites the IMF to further explore the general principles for the use of standstills by crisis-affected countries. In parallel, the lending into arrears policy should be clarified and applied more transparently.
Strengthening the fight against abuses of the global financial system
19. Major initiatives have been launched to fight against abuses of the financial system, to promote adherence to the international regulatory and anti-money laundering standards, and to eliminate harmful tax practices. In this regard, the European Union is further enhancing its action to fight money laundering, and the EU's Economic and Finance Ministers recently approved unanimously a revision of its Directive on the prevention of the use of the financial system for the purpose of money laundering. We also reaffirm our strong support to the Financial Action Task Force (FATF) and call for the recognition of its Forty Recommendations as the anti-money laundering international financial standards. The EU welcomes the progress made by most of the fifteen countries and territories listed as `non-co-operative' by FATF. We also welcome the work of the OECD to address harmful tax practices as well as the commitment of certain Off Shore Centres to improve supervisory, regulatory co-operation and information exchange policies and practice.
20. We urge the IMF, the World Bank and other relevant institutions, each according to its specific mandate, through technical assistance, programme design and policy dialogue, to encourage and assist countries and territories to adopt and implement appropriate international anti-money laundering standards. Accordingly, it is also essential that Article IV consultations where appropriate include a section dedicated to the actions implemented to fight against money laundering, including the assessment of the implementation of those of the FATF Forty Recommendations relevant to macroeconomic or financial stability. Moreover, Financial Sector Assessment Programmes, Financial Sector Stability Assessments and Reports on the Observance of Standards and Codes should, where relevant, incorporate a section on the fight against money laundering.
21. The EU remains committed to continuing a dialogue with the identified `non-co-operative' countries and territories. However, we reaffirm our commitment, where dialogue has failed to generate adequate progress in undertaking the necessary reforms to laws and practices, to implement immediately, in concert and concomitantly, the countermeasures decided by the FATF, to the adoption of which the EU will actively contribute.
Continued economic growth in the European Union...
22. The European Union's economic performance has improved significantly over recent years, with strong output growth, low inflation and substantial job creation. Unemployment has fallen to the lowest level since 1991. Sound public finances have been restored. The EU's economic fundamentals are good. Although the external environment poses risks to the outlook, the EU economy stands stronger than in earlier downturns, and is in a position to rely on its own strengths. Therefore, the Commission forecasts growth in GDP of the European Union to be close to 2.8 % and 2.9 % in 2001 and 2002.
23. The sustainability of growth hinges both on sound macro-economic policies and further structural reforms. Regarding the former, budgetary policy will continue to be geared to achieving public finances close to balance or in surplus. This will help to prepare for meeting long term challenges of the ageing populations and at the same time foster stable macroeconomic conditions, within the context of monetary conditions conducive to price stability, economic growth and continued employment creation. Regarding the latter, the EU is committed both to maintaining its momentum to achieving greater competition in product and capital markets and added flexibility in many labour markets and to implementing further structural measures with a view to raise the productive potential of Member State economies, and consequently to ensure higher rates of sustainable economic growth and employment creation in the long run.
...despite a less supportive external environment
24. There are considerable uncertainties in the world economy and the downside risks are substantial. Importantly, the US economy is slowing down markedly. While some adjustment towards a more sustainable growth path could helpfully lead to a correction of imbalances that had built up during the expansion, the downturn of growth has been sharper than expected, creating new challenges for US policymakers and heightening uncertainty for the global economy at large. The remarkable expansion of recent years has left US policymakers with room for manoeuvre. The available instruments now have to be used judiciously to steer the economy towards a sustainable course. Macro-economic policies in support of sustained growth should preserve budgetary sustainability and price stability, and encourage increased national saving over the medium term.
25. The Japanese economy also continues to perform weakly, showing few signs yet of sustained improvement. Whilst the EU welcomes the steps to ease further monetary policy announced by the Bank of Japan on 19th March, full economic recovery is contingent upon urgent progress in the implementation of further structural reforms, in particular in the financial sector.
26. The US slowdown is affecting the global economy as a whole, and several emerging markets in particular, especially in Asia and Latin America. The EU stresses the importance of further intensive efforts to implement structural reforms in all emerging economies to minimise vulnerabilities to external shocks, directly through traditional channels such as trade, but also through financial linkages.
27. The EU expresses strong support for the Turkish efforts to reform the economy, in particular the banking sector. We welcome the readiness of the IMF and the World Bank to provide additional exceptional financing. The success of Turkey's programme hinges on its rigorous implementation in combination with maintained support from the international community, including from the private sector. Argentina is already implementing a Fund-supported programme. The EU welcomes the measures announced to improve the budgetary position, and encourages the authorities to continue the process of fiscal and structural reform. Finally, the EU welcomes the recent improvements in the macroeconomic and balance of payments situation of the Russian economy which should be used to speed up the process of structural reform. The EU urges the Russian authorities to meet in full their financial obligations and to undertake the necessary measures to safeguard external confidence.