An economic crisis comparable in size and virulence to the Lehman Brothers episode could erupt if Italy and Spain lose their ability to borrow, warned Uri Dadush in testimony before the Senate Banking Committee. He outlined the immediate steps the G20 can take to stabilize the eurozone and return the world economy to balanced, sustainable growth.

Policy Recommendations:

  • Build a firewall around Italy and Spain: The G20 must lead an effort to expand the International Monetary Fund’s (IMF) resources by about $1 trillion to supplement efforts already underway in Europe. Such a step represents a relatively cheap form of insurance for the United States and other G20 economies measured against the catastrophic consequences of a eurozone collapse.
  • Impose demanding conditions on Europe: The IMF should impose strict conditions to ensure the EU currency union is sustainable in the very long run. This needs to include new fiscal and monetary arrangements, a powerful European banking authority, mechanisms for managing default and exit from the eurozone, and structural reforms that increase product and labor market flexibility inside the union.
  • Foster open international trade and reform the WTO: By encouraging “plurilateral” negotiations—among a critical mass of countries, rather than the entire WTO membership—the G20 could establish a new, much more flexible negotiating framework capable of yielding gains across a wide range of sectors in the decades to come.
  • Focus on the big picture: Despite suggestions that it is not representative and lacks technical expertise, the G20 should continue to serve as a sort of global steering committee, coordinating the response to crises and providing general guidance for how the international institutional architecture should evolve.

Dadush concludes, “Above all, the G20 needs to avoid the temptation to be all things to all nations and instead keep its eye on the ball—the systemic short- and long-term global policy issues that affect all nations and require major coordinated reforms. It also needs to know how to pick its fights and focus on those issues where there is a genuine emerging consensus about what to do.”