Stewart M. Patrick

The Internationalist

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The G20 and the Eurozone Crisis

by Stewart M. Patrick
June 15, 2012

Germany's Chancellor Merkel and U.S. President Obama discuss before a meeting on the second day of the G20 Summit in Cannes (Kevin Lamarque/Courtesy Reuters) Germany's Chancellor Merkel and U.S. President Obama discuss before a meeting on the second day of the G20 Summit in Cannes (Kevin Lamarque/Courtesy Reuters)

On Sunday, one day after Greeks vote in elections that may result in their withdrawal from the eurozone, and throw that single currency union into untested waters, leaders from the world’s twenty largest economies will gather in Los Cabos, Mexico, at the Group of Twenty (G20) summit. The eurozone crisis will undoubtedly dominate, but under the surface there are important issues of global cooperation that the leaders must not forget.

Ultimately, the G20 doesn’t have the authority or capacity to solve the eurozone crisis, and major decisions will have to be taken at the eurozone summit, which takes place the following week. On the margins, non-eurozone countries will continue to press their eurozone colleagues to take more vigorous steps towards fiscal federalism and establish an emergency firewall to prevent devastating contagion in the eurozone periphery if Greece withdraws. This includes increasing the magnitude of the European Financial Stability Facility and considering other steps ranging from eurozone bonds to deposit guarantees for European banks. Merkel will likely be the odd person out—in terms of being on the receiving end of this pressure. In the last few days, even China has “piled pressure” on Europe to reassure investors to prevent bank runs on European banks and risk plunging the global economy into a deep recession. It will be interesting to see if non-eurozone members will be willing to further increase the coffers of the International Monetary Fund (IMF), after pledging $430 billion in April, but the G20 is unlikely to take concrete steps to shore up Europe.

Fundamentally, the major challenge is the prospect of a universal economic slowdown and the question of where growth could come from. Europe is in turmoil; the U.S. recovery appears increasingly tepid; Japan is still struggling; and all signs point to significant slowdowns in China and India—and perhaps in Brazil as well.  There are a number of policy instruments that have been used to stimulate global demand over the past four years—such as quantitative easing and coordinated injection of funds into the global economy. But especially in Europe and the United States, governments are confronting high deficits and fierce political disunion that will prevent, slow, or dilute any such steps.

In addition, G20 leaders must deliver on global financial regulation. The financial stability board, which is mandated to harmonize regulations across sovereign jurisdictions, needs more authority and capacities to oversee systematically important financial institutions (SIFIs). But the global financial industry is pushing back.  Even Basel III, a comprehensive set of reform measures to reduce serious risk in the banking sector, has met resistance, and implementation lags. It remains an open question if the Basel III commitments will be fulfilled, and if much-needed stricter rules will even be debated.

G20 nations should use the forum to forge consensus on reform of international financial institutions like the World Bank and IMF. European countries and the United States have pledged to reform the IMF quota system, in particular, so that that institutions’ leadership and voting powers more accurately reflect today’s distribution of global power. However, these changes require domestic legislation in many countries. But the United States, as well as Europe, has been dragging its feet.

Finally, the Los Cabos summit represents a missed opportunity to move forward on green growth—and use the summit to “pre-negotiate” to ensure that the Rio Plus Twenty (Rio+20) UN Conference on Sustainable Development, which begins Wednesday June 20, is not a train wreck. Huge divergences over the shape of the Rio+20 final communiqué remain; blocs of countries are aligning against each other; there is no agreement on whether countries should aim to make binding commitments; and nations have yet to decide if they should replace the millennium development goals with sustainable development goals.

However, experts and policymakers around the world don’t necessarily have the same perspectives on the upcoming summit—or what it means for global financial governance. Check out the third installment of the Council of Councils Global Expert Roundup, featuring analysis on the G20 summit from Canadian, Mexican, German, and Indonesian scholars.

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