Executive Summary The new German government pushes to digitize and green the G7 economies
Holding the G7 presidency in 2022, Germany is responsible for setting the Group’s agenda, leading negotiations, and hosting the annual Leaders’ Summit at Schloss Elmau in Bavaria on June 26-28.
Berlin aims to green and digitize the G7’s financial policy, such as through new financial technology regulations and a ‘climate club’ to align investment flows with climate goals.
After 16 years with former chancellor Angela Merkel as a G7 fixture, the presidency is a key opportunity for the new German government to demonstrate its future policy direction to international partners
State of Play 2022: A year of new challenges for the G7
Representing over 40% of the world’s GDP, the G7 still plays a key role in an increasingly complex global financial system. In addition to the immediate economic challenges posed by the COVID-19-induced downturn, G7 members are facing a series of financial challenges, such as heightened global inflation rates and unstable financial markets. At the same time, Russia’s aggressive actions on the border of Ukraine have put financial sanctions back on the agenda – including the potential exclusion of Russia from the SWIFT payment system. Furthermore, the recent proliferation of innovative financial technologies, including but not limited to cryptocurrencies, is bringing new regulatory and monetary questions to the fore. Finally, the G7 has come under increasing pressure to leverage financial policy to address climate change, particularly in the wake of recent extreme weather events like the 2021 floods in Western Europe. All these financial policy challenges reinforce the G7’s role as a forum for international financial cooperation and the importance of G7 members working together to address these challenges.
Key Issues A new German government is setting the agenda
In January 2022, Germany assumed the G7 presidency, shortly after the formation of a new government marked the end of the Merkel era. Chancellor Olaf Scholz of the center-left Social Democratic Party (SPD) and Finance Minister Christian Lindner of the pro-business Free Democratic Party (FDP) will be leading the G7’s financial policy negotiations. While this unprecedented coalition of SPD, FDP, and the Greens will aim to bring a new direction also to the G7, Scholz's previous role as Merkel's finance minister and vice-chancellor makes for at least some continuity.
Indeed, a significant portion of Germany’s agenda will be consistent with the G7’s traditional approach to financial policy. This will include discussing ways to strengthen the international financial system, which is particularly important in the context of the global economic recovery. Given Minister Lindner’s belief in fiscal prudence, he will likely steer conversations to managing inflation rates through coordinated financial efforts. The agenda is likely to build also on previous G7 debt relief efforts in cooperation with the IMF to ensure developing countries have access to the resources they need to rebuild their post-pandemic economies. Finally, it is to be expected that Germany will want to discuss protecting market integrity from financial crimes through comprehensive cross-border efforts and law enforcement.
Current events will also shape the agenda with Russia’s threat of war with Ukraine driving the debate on financial sanctions. When Russia invaded Crimea in 2014, the group suspended Russia’s membership of the then-G8 and coordinated financial sanctions vis-à-vis Moscow. The same situation may play out again in 2022 with the G7 cutting Russian financial institutions off from global transactions and, in a new move, imposing an embargo on US-made or US-designed technology used in defense and consumer industries.
The G7: a more digital and green approach to financial policy
Beyond focusing on the more traditional aspects of financial policy, the German priorities demonstrate the intention to accelerate the trend within the G7 to digitize and green financial policy. Driven by the finance minister’s free-market spirits, Berlin will try to leverage the digital economies of the G7 to create sustainable growth. In parallel, and to ensure that rules keep pace with the digital economy’s evolutions, the G7 will likely focus on addressing the regulatory challenges posed by the rise of innovative financial technologies. For example, crypto assets are gaining in popularity but are often anonymous, making it difficult for regulators to trace and identify international illicit transactions. They can also create financial instability by reducing central banks’ ability to effectively manage monetary policy. The global nature of crypto assets, in turn, requires international cooperation, particularly to tackle data gaps, monitor transactions, and create international rules when for central banks issuing digital currencies.
Greening the financial system to achieve global climate goals is also a priority for Germany. It wants to create a climate club of like-minded countries to achieve carbon net-zero while ensuring their industries’ competitiveness is not disadvantaged. Inspired by the G7’s successful introduction of a 15% global minimum corporate tax which now includes 136 signatories, Berlin’s strategy is to first work with European and G7 partners to then bring the G20 on board. Specific goals are to implement similar domestic prices for carbon emissions, develop global standards to measure the CO2 content of products and materials, transform industries to be climate neutral, prevent carbon leakage in accordance with the EU’s Carbon Border Adjustment Mechanism, and create a global green hydrogen supply chain.