On June 7th the International Monetary Fund (IMF) released two reports concerning the state of the world economy, World Economic Outlook Update (WEO) and the Global Financial Stability Report Market Update (GFSR). According to the WEO, cumulative worldwide economic growth in 2010 is expected to increase by 0.5 percent, reaching a level of 4.5 percent. The report advocated for advanced economies to continue focusing on medium-term growth through appropriate fiscal consolidation and reforms to tax systems. However, in the GFSR the IMF noted signs of decreasing financial stability throughout the global economy, warranting further fiscal-policy action to increase confidence in financial systems.

According to the GFSR, several financial indicators have shown decreased financial stability since May 2010. Adverse economic feedback loops could soon arise, whereby increased sovereign risk will effect bank’s lending behavior, which in turn strains the economy, leading back to sovereign risk. Further, the international nature of interbank lending is removing barriers to the spillover of national economic woes, with the instability of one nation adversely influencing others. The tightening of financing in emerging markets, one of the most significant economic recovery drivers, is adding to the decrease in global financial stability. The Euro area is currently showing the highest signs of financial instability and reciprocal risk loops.

The IMF has reported a small improvement in key financial indicators in June, but claimed it is too early to tell whether this is the beginning of a recovery. In response to the possible instabilities, the IMF has recommended Governments worldwide to instate policies addressing sovereign risk, along with improving transparency and resilience of struggling banks. Additionally, the report urged the use of the newly established European Financial Stability Facility, and liquidity support for financial markets.

Despite the suggested drop in financial stability, the WEO reported a better than projected level of global economic growth. The robust economic increase of Asia has been attributed to a significant portion of the recovery. The WEO stated that adequate stability, transparency and liquidity measures should ensure continued levels of growth. However, inappropriate policy implementation and fiscal stimulus package treatment could result in a approximate 1.75 percent from baseline drop in global growth in 2011, with a Euro area fall of 3.5 percent.

The IMF summarized the sentiment of both reports, saying “…ambitious and complementary policy efforts are needed to promote strong, sustainable, and balanced global growth over the medium term.”

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On June 23rd the European Commission held an initial debate on a Carbon Tax proposal brought forward by Algirdas Semeta, EC Commissioner on Taxation. The debate resulted in the EC only resolving to engage in an impact assessment of an EU-wide Carbon Tax system, with no headway made towards dismissing the tax or initiating a legislative approval process. A similar assessment had already been held in 2008 for a previous Carbon Tax proposal. Although the EC now deems it necessary to reassess the tax’s impact on the current economic environment.

Despite the lack of results from the debate, Emer Traynor, spokeswoman for Algirdas Semeta, described the meeting as a “…very useful and constructive discussion.” She went on to say that Algirdas Semeta had the general support of other EC Commissioners. Emer Traynor added that throughout the meeting the EC reaffirmed its support for the current EU CO2 Minimum-Taxation Rate, which is designed to deter under-taxation of emissions.

Under Algirdas Semeta’s proposal, a new tax system should be implemented across the EU to cover emissions not currently addressed by the EU Emissions Trading Scheme (ETS), such as those produced by the transport and agriculture sector. A predetermined flat-rate would be charged for emitted carbon gases, with the proposal suggesting a levy of between EUR 4 to EUR 30 per tonne of carbon. In previous statements, Algirdas Semeta indicated his belief that EUR 20 per tone would be an optimal rate.

If upon further reviews the EC decided to pursue the tax, a legislative proposal would be sent to the European Parliament where a unanimous vote would be required to approve the measure. Currently, support for a EU-wide Carbon Tax is conflicted, with some nations supporting the principal but not its proposed implementation. The UK Government has already indicated its apprehension to giving extra tax collection powers to the EU, while maintaining that the issue of environmental legislation needs greater attention. However, the Governments of Italy and France have giving general support to the idea.

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On June 14th the CEU released notes on the conclusions reached at the 3023rd Foreign Affairs Council Meeting, held in Luxemburg. The meeting yielded 10 points on the subject of cooperation with developing nations in promoting good governance in tax matters.

According to the CEU, a fair and efficient tax system underpins state legitimacy, and strengthens the social contract and sense of accountability between the Government and citizens. With this sentiment in mind, the CEU recommended that developing economies mobilize national resources for increased development through efficient tax systems which promote sustainable growth and reduces aid reliance. Creation of adequate tax systems would also address the issue of illegal capital flight and tax avoidance.

The CEU stated that developing nations bear primary responsibility for the creation of their own tax systems. Although the release also confirmed that the EU and its member states will provide support to developing nations in overcoming domestic and international obstacles while revising national tax landscapes. The Council also emphasized the importance of the EU introducing the use of “a programmatic and comprehensive approach to support demand driven tax administration reforms” when rendering assistance to developing countries. EU member states were also encouraged to support previously established tax assistance organizations, like the Centro Inter-Americano de Administraciones Tributarias and the African Tax Administration Forum. In regards to mineral and resource-rich nations, the EU was recommended to support the Extractive Industries Transparency Initiative, which the CEU considers to be an effective tool in promoting economic transparency.

Internationally, developing nations should be encouraged to participate in the pre-established structures of international tax cooperation and transparency. Specifically, the Council was in support of the active adoption of internationally agreed upon standards for taxation and tax information exchange, as presented by the Organization for Economic Cooperation and Development and the United Nations.

Emphasizing the importance of support for nations revising their tax systems, international economic analysts have agreed that developing nations need even further administrative and planning assistance in developing tax systems on par with current international standards and appropriate to current economic conditions. Specifically, researchers pointed to recent tax changes in Kenya, which have been labeled by international analysts as inadequate for Kenya’s economic state and ignorant of current international moves towards broadened tax basses and lessened emphasis on income taxation. According to international economists, the changes would have been optimized if Kenya was rendered adequate assistance in redesigning and implementing optimal revisions.

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Ahead of the upcoming June G20 Summit in Toronto, Canada, the German and Canadian Governments are increasing efforts in swaying international Governments towards their views on the proposed introduction of an international bank tax system. At a conference on new financial regulations held in Berlin on May 20th, German Chancellor Angela Merkel stated “We will campaign for a tax on the financial markets and we will campaign for that at our (G20) summit in Canada.” While in the week leading up to Angela Merkel’s statements, several Federal Canadian Cabinet Ministers met with select international delegations to advocate an opposition to an international bank tax.

On May 18th Jim Flaherty, Finance Minister of Canada, met in Mumbai with representatives of the Indian Government to explain the Canadian view on an international bank tax. On the same day, Stockwell Day, Minister for the Asia–Pacific Gateway, held a meeting in Beijing, and Peter Van Loan, International Trade Minister, spoke at a conference in Washington D.C. All three officials campaigned against any proposed bank tax. Tony Clement, Industry Minister of Canada, hosted a corresponding conference in Canada and explained the Government’s stance, saying, “Make no mistake, our government is opposed to a global bank tax. This tax would reach into consumers’ pockets and punish our financial institutions, which have taken precautions to avoid turmoil.” The Canadian Government has also explained that the national bank system is safe and renowned for its stability, and the Canadian finance industry should not have to pay for the mistakes of other nations. Stockwell Day has already reported that the Government of the People’s Republic of China fully supports and shares Canada’s sentiment.

Conversely, Angela Merkel used the current Euro-zone debt crisis to springboard into advocating the need for a set of unifying international financial regulations, including fiscal measures such as multinational bank tax. Angela Merkel stated on May 20th that the German Government will continue to rally supporters for an international bank tax until the upcoming G20 Summit. If no conclusive decision is reached among G20 leaders, the Chancellor will continue her efforts in reaching a Euro-Zone only solution.

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On May 9th the IMF announced its new recovery-loan package for Greece, in which it will provide Greece with a total of EUR 30 billion over the next three years. Approximately EUR 5.5 billion will be made available immediately. In 2010, Greece will receive a cumulative EUR 10 billion of financial support, as part of this loan package. The combined IMF and EU support packages are designed to allow the Greek economy and Government three years of “breathing room” before turning to international financial market for any further support.

The loan, regarded by the IMF as the Stand-by Package, is designed to work in conjunction with the EUR 110 billion of financial support provided by the European Union, and allows Greece enhanced access to IMF supportive resources. Announcing the loan approval for Greece, Dominique Strauss-Kahn, IMF Managing Director, said, “Together with our partners in the European Union, we are providing an unprecedented level of support to help Greece in this effort and—over time—to help restore growth, jobs, and higher living standards.”

According to an IMF statement, the monetary assistance will allow the Greek Government to implement its current economic recovery plan. Under the program, substantial efforts will be made by the Government to correct the nation’s high debt-to-GDP ratio, its 13.6 percent of GDP budget deficit, and instate positive growth policies, which should eventually lead to sustainable growth and tax revenues.

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