Each nation must reform to restore world growth

It is now just over three years since Lehman Brothers dissolved into bankruptcy. Shattered by vast debt it had no hope of recovering. The largest bankruptcy in US history, sparked a period of uncertainty in global financial markets unparalleled since the 1930s.

Events quickly ricocheted around the world. More than US$12 trillion was lost from global markets in the space of a few months.

The crisis of liquidity in banks along with a failure of regulation and an unsustainable housing market in the United States drove institutions that had been pillars of our financial systems to the brink and beyond.

When G20 leaders convened for the first time ever they took decisive action. Large and coordinated fiscal and monetary stimulus halted the economic freefall, saved jobs and restored global growth. The Government’s bank guarantees and fiscal stimulus kept businesses open and hundreds of thousands of Australians in jobs.

In 2011, we once again face uncertainty and a crisis of confidence in the global financial system. As the IMF has described it, we are entering a dangerous new phase. This time the threat is principally about sovereign debt rather than a financial sclerosis triggered by hidden subprime debt.

Significant challenges in Greece and its broader implications have caused volatility in global capital markets. Banks in Europe have had their credit ratings cut and are finding it harder to raise capital.

Low confidence is also being fuelled by concerns about anaemic economic growth and persistently high unemployment across the North Atlantic. The immediate risk is a European crisis. But its implications are global. While Australia is situated in the right economic hemisphere, our domestic economy is not immune from developments abroad. Along with other G20 members, we have a profound interest in ensuring Europe takes the necessary steps to resolve the crisis, and contain its fallout.

These steps are straightforward, but not easy. What is needed is a substantial and comprehensive plan to restore market confidence in Europe’s capacity to meet its debt obligations.

The financial firepower of the European Financial Stability Facility needs to be significantly increased or leveraged up. Institutions such as the IMF must have sufficient financial resources to draw on should they be needed.

There needs to be an orderly and durable solution for Greece’s sovereign debt load. A plan must be put in place to recapitalise the European banking system, to avoid the crisis spreading further. The necessary steps to strengthen fiscal governance in the euro area need to be set in train to ensure there is no repeat of this crisis.

The steps Europe has taken to implement the 21 July decision to increase the capacity and flexibility of the EFSF are welcome, but not sufficient. As G20 finance ministers have said, the leaders of Europe at their meeting on 23 October must outline a comprehensive plan that addresses all these elements.

Other G20 countries also have a role to play in restoring the global economy. In the US, more measures are required to support the recovery, while ensuring the US budget is put on a sustainable path in the medium term. I urge Congress to pass President Obama’s American Jobs Act in some form, which would do much to support growth in the short term. The US must also take the tough decisions needed to address both entitlements and tax measures to restore US fiscal health.

Big emerging market economies, including China, need to rebalance their economies towards domestically-driven growth, and move towards more market-determined interest rates and exchange rates.

And all G20 countries must undertake structural reforms to raise potential rates of growth.

Finally, we need to find a way to make progress on world trade.

Expanded global trade would provide a much-needed economic stimulus to all countries. Resisting protectionism is critical, but not enough. We need to find a way to make gains on trade – if not through the Doha Round, then through alternative means. The health of the world economy demands it.

Australia has a role to play in all of this. We are taking our own hard decisions to keep our economy strong. We are increasing national saving, not just by returning the budget to surplus, but also increasing private saving by raising the superannuation guarantee contribution. We are undertaking the necessary reforms to strengthen our economy and position it for the future – by investing in skills and infrastructure, reforming our tax system, and transitioning to a clean energy economy.

With coordinated action by all G20 economies we can restore the global economy to health, addressing both the immediate crisis and the longer-term constraints on global growth.

We each have a part to play and we each must pull our weight.

This is the message I will be taking to Cannes when G20 leaders meet in a fortnight.