G20 success depends on what Europe does next

LOS CABOS, Mexico – The leaders of the G20 powers left their annual summit on Tuesday, June 19, desperately hoping that Europe is ready to take the measures it needs to head off a catastrophic economic collapse.

Observers who came to Mexico for the get-together of the world’s most powerful leaders were unanimous in warning that time is running out for European leaders to pull the eurozone single currency bloc back from the brink.

“The big story about Europe is that it’s still on the brink of a systemic collapse. It’s not functioning. The whole story is how do you not fall off the precipice,” said Yves Tiberghien, of the University of British Columbia.

“If there is an unwinding of the eurozone… this would be the defining crisis of the entire century. It would be catastrophe. But to solve it is very difficult, because to solve it you have to build the missing institutions.

“To do this will take years, and so that’s where the G20 comes in. The Europeans basically need some time. You need to hold the markets off a bit. Anything to give them space,” the French political scientist warned.

European leaders returning from the G20 will barely have time to digest the message of Los Cabos before they head to next week’s European Council meeting in Brussels, where they will be expected to agree an action plan.

In Mexico, Europe’s partners were clear on what that should entail: A unified system of banking regulation, pooled economic sovereignty and greater willingness from the European Central Bank to support struggling member states.

But many of these measures are anathema to European governments, especially Angela Merkel’s conservative German administration, and some would imply changes to EU treaties or member states’ constitutional rules.

But, as the leaders of Europe’s international partners insistently warned, there is no time to waste.

“In some ways it was a G20 summit, in some ways it was a preparatory meeting for the European summit,” said David Shorr, an American foreign policy expert from the Stanley Foundation, which studies global governance.

“The diplomacy here is leaders from outside Europe expressing their concerns about how the crisis could overspill onto them. The new IMF resources are a firebreak to protect them against that,” he said.

Emerging economic powers, led by China, India, Russia and Brazil, agreed in Mexico to boost the International Monetary Fund’s lending pool to $456 billion, with the clear quid pro quo that Europe get its house in order.

“We were talking about the worst case scenario and the second worst case scenario. One threat is fast-acting, it’s financial contagion leading almost immediately to a credit freeze up,” Shorr warned.

“But then, the slower motion threat, the next worst case scenario, is a serious double dip recession in Europe, dragging the rest of the global economy down with it,” he said.

The summit final statement will outline the broad strokes of reforms that could see a eurozone financial government built up, but it will be for Europe to fill in the details in the weeks to come.

“The euro crisis is a crisis of institutional incompleteness,” Tiberghien said. “They created this great experiment in the 1992 Maastricht Treaty.

“It was very daring but, as we now know, it’s incomplete, it’s very dangerous, it doesn’t work. It’s not functional to do monetary union without banking union and fiscal union and therefore higher political integration.”

Officials at Los Cabos said that even Germany was now coming round to the idea of greater fiscal integration within the eurozone and might allow the European Financial Stability Facility to buy the bonds of debt-ridden members.

But will the G20 provide enough of an impetus to break the political log-jam?

“I think it’s a speed-up,” said Alan Alexandroff of the Munk School of Global Affairs at the University of Toronto. “I mean, you can see it in the discussion around questions like banking integration.

“Banking integration was perceived as being way off in the future.

“And now it would appear even from officials from the EU, that they’re now looking at a timeframe of six months to a year, rather than what was seen as being a very far distant notion,” he explained.

“Obviously the crisis itself has its own demands, but clearly they’re hearing from the other G20 members about the concerns being raised about the spillover and the consequences.” – Agence France-Presse