The G20 and the Eurozone Crisis

Carnegie Endowment for International Peace

Following the G20 summit at Cannes, Treasury Department Under Secretary for International Affairs Lael Brainard and Moisés Naím discussed the key developments to come out of the summit and what they mean for the euro and the global economy.

In Cannes, G20 leaders made a subtle but profound shift back to safeguarding the global recovery, said Brainard. G20 members, however, are facing different challenges and have different political constraints, preventing the universal call for stimulus that followed the 2009 London summit. Nevertheless, policymakers are uniformly focused on growth and financial stability.

The central challenge to growth and economic stability is the crisis in Europe. Brainard discussed the eurozone crisis, the role the international community should play, and the Obama administration’s approach to the current problems facing the United States.

THE EUROPEAN CRISIS

The United States and the G20 stands firmly behind the eurozone, but Brainard emphasized that European resources will remain at the center of any rescue plan.

EU Summit: At their October summit, eurozone leaders announced a comprehensive plan that will build a firewall to protect stable countries from contagion and recapitalize the banking system.

Italy: The EU has approved a strong fiscal adjustment program that has parliamentary support in Italy. It is very important that Italy move forward with comprehensive structural reforms, and the IMF has been invited to Italy to bolster market confidence.

The ECB: The European Central Bank (ECB), one of the few pan-European institutions, will play a central role in resolving the crisis. Brainard noted that the ECB is already providing substantial support, by providing liquidity to the banking system and through its securities market program and traditional monetary policy operations.

Governance: European policymakers are committed to doing whatever it takes to defend the euro. Given that the consolidated eurozone is in reasonable shape—aggregate debt and deficit levels are manageable—eurozone leaders now need to adapt their current institutions to challenge they now face. The creation of the rescue fund (the European Financial Stability Facility, or EFSF) is an example of the institutional evolution that has already occurred.

THE IMF’S ROLE

The United States—the largest shareholder of the International Monetary Fund (IMF)—supports the IMF’s intervention in Europe. The role of the IMF, however, must be secondary to that of EU institutions, which will be the first line of defense against the current crisis.

Bringing Credibility: The IMF will help Europe regain the market’s confidence by providing technical assistance and adding credibility and transparency to the European adjustment.

IMF Expansion: Brainard noted that the IMF—with uncommitted resources four times greater today than they were in 2008—is well resourced and has ample capacity to deal with the current challenges.

Developing Countries: Many developing countries have long wanted to increase their representation at the IMF. The United States believes it is important for international organizations to evolve alongside the global economy and took an important step in this direction by agreeing to a shift in IMF representation in favor of developing countries at the G20 summit in Seoul.

U.S. POLICY

Brainard emphasized the need for the United States to combine immediate support for job growth with medium-term deficit reduction.

U.S. Fiscal Policy: As a leader of the global economy, the United States must focus on strengthening its own recovery. Brainard noted that it is clear the United States needs to reduce its deficit and lower its debt level, but the immediate emphasis should be on getting people back to work, an approach supported by the IMF.

Trade: Exports, which are growing four times faster than the domestic economy, have been an important source of growth in the United States. Exports to developing countries have been particularly strong. The United States hopes to make further progress on trade at the upcoming Asia-Pacific Economic Cooperation (APEC) summit, which will help it reach President Obama’s goal of doubling U.S. exports in five years.

Policy toward China: The United States continues to press China over its exchange rate. A more flexible exchange rate would be good for the U.S.-China relationship, good for the global rebalancing effort encouraged by the IMF, and good for China, which has become too reliant on investment and exports for economic growth.

Financial Sector Taxes: Brainard argued that the financial sector should be discouraged from taking the risks that led to the 2008 crisis. The United States believes that taxing the balance sheets of large institutions is the most efficient way to achieve this goal, though other countries may use slightly different methods, such as a financial transaction tax.