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Friday, March 2, 2012
Containing the European crises
The Group of 20 finance ministers and central bankers who ended their latest meeting Sunday in Mexico City devoted a lot of time to discussing the European sovereign debt crises and stressed the importance of the eurozone nations' forming a united front to solve problems.
Despite the potential that the European crises could spread to other parts of the world, they, regrettably, failed to agree on concrete actions for averting that risk.
They underlined that the eurozone's financial safety net must be strengthened before the International Monetary Fund is strengthened, confirming the principle that countries in an area where a crisis first occurred have a heavy responsibility to solve it.
An immediate issue will be whether the 17 eurozone countries will be able to expand the European Financial Stability Facility, which is being succeeded by the permanent European Stability Mechanism beginning in July, from the current lending ceiling of €500 billion. A conclusion on this issue is expected to come by the end of March. It is suggested that the upper limit will be increased to €750 billion.
The Mexico City meeting should be interpreted as having put increased pressure on Germany concerning its role and responsibility. Germany can help expand the EFSF and the ESM and steer Greece to financial reconstruction and structural reform.
Although the Bundestag on Monday approved the second round of the €130 billion bailout for Greece, German finance minister Wolfgang Schaeuble in Mexico City expressed his opposition to "endlessly pumping money into stability funds." Although signs reportedly emerged that Germany was softening its position, there is no predicting its eventual attitude.
Greece's default seems unlikely to happen, but optimism is not warranted. If political forces opposing the austerity measures win in the April general elections, the Greek crisis could deepen.
To cope with the possibility of the European crises spilling over elsewhere in the world, the IMF thinks that its funds should be increased by $500 billion. The United States, which maintains the biggest quota in the IMF, is wary about committing to more funds due to reluctance in the U.S. Congress, while China and Japan are reportedly willing to increase their contributions. The U.S. should overcome its inward-looking attitude since the 2008 financial crisis started there.