In August, as the euro crisis worsened and its focus shifted on Spain and Italy, the G20 issued a statement committing to take “all necessary initiatives in a coordinated way to … ensure financial stability and liquidity in financial markets”. Since then, two things have happened. First, sovereign risks have increased, lacking decisive action by some governments and a convincing European response. Second, such response in the end came about, on October 26, in the form of a convoluted but substantive agreement by the euro Summit on all three crucial fronts – Greece, banks and the rescue fund. Can the G20 leaders convening in Cannes assume that those globally coordinated initiatives have become unnecessary?
Hardly. Not only because many details – where the devil usually hides – of the European agreement are still to be fleshed out. The euro crisis is global in nature, and calls for a global involvement in any case. There are at least three ways in which the G20 can contribute.
First, while the intra-continental ramifications of European sovereign risks (including indirect effects through banks) have been extensively explored by the European Banking Authority and national supervisors, their global repercussions and feedbacks are less known. The concerns expressed recently in the US, by no less than President Obama, on European risks are an indirect demonstration that these links are a real threat. The silence from other quarters, notably large emerging countries’ official wealth holders, is not necessarily reassuring. The Financial Stability Board, which since 2009 has acted as regulatory arm of the G20 and reports to it, has the expertise and information necessary to conduct this analysis.
The second and central issue concerns financial contributions. Discussions about emerging countries providing support to EU sovereign markets have so far been bilateral, involving mainly China and Brazil, not the G20 as such. All have been inconclusive. The EU agreement does not require such involvement explicitly, only leaves the door open to contributions to the European Financial Stability Facility (EFSF) from “public and private” sources. One wonders, however, if such involvement is not in fact implicit and indeed necessary to make the enhanced EFSF work. The alternative envisaged by the euro Summit is to expand the scope of the fund (whose effective capacity is limited by the contributions from AAA countries alone) by providing partial first-line insurance to new bond issues by beneficiary countries. While multiplying the scope of the guarantees, this also increases the risk on them, with possible implication for the donors’ ratings. An inherent fragility that can be backstopped only in two ways: either with further contributions to the fund itself – that today can come in sizeable amounts only from emerging countries – or by the European Central Bank. It is not a coincidence that many have noted after October 26 that, in spite of the agreement, the role of the ECB remains crucial.
Finally but importantly, the G20 is in a unique position to contribute to macroeconomic and budget surveillance on euro area members, reinforcing, from an external and independent angle, the peer pressure already underway within Europe. This falls entirely within its remit. While the euro area is treated as a single entity in many G20 discussions, its largest countries are individually seating at the table and policy responsibility in crucial areas – fiscal, product and labour markets – belongs to national authorities. Further hesitations or failures in these areas by high-risk countries have global systemic implications. The G20 responsibility de-facto is already involved. Better to prevent, than to try to cure later.
The G20 members share an interest that the decisions taken by Europe last week are successful. The active role of the ECB as lender of last resort to ailing governments should remain as limited as possible, lest opening a Pandora’s box whose ultimate consequences are hard to predict. The G20 can help keep this option at safe distance. While at the French Riviera this week, the world leaders should urgently consider ways to do this.