Carnegie Endowment for International Peace
While Europe needs help from the rest of the G20 to build a firewall around Spain and Italy, the G20 is reluctant to pledge money in support of the troubled countries because it sees that Europe hasn’t developed a clear and unified approach to deal with the crisis.
The German position (no new money, no ECB guarantees, and no euro bonds) would place the whole burden essentially on troubled countries to reform with very little additional help from eurozone partners.
Any external infusion of funds would best be channeled through the IMF, which would then pose demanding conditions not just on the countries directly borrowing from it, but also find ways to demand changes in the eurozone’s institutional set up and monetary and fiscal policies in the healthy core, to ensure the euro’s long-term survival.
With Italy’s high debt, low long-term growth rate, and inflation, the country must run a primary surplus of around 5 percent on a sustained basis in order to keep its debt/GDP level from spinning out of control.
Based on the experience of Greece, Ireland, and dozens of other countries that have had to resort to IMF-style rescue programs, Italy is unlikely to avoid a protracted and deep recession.
Five misconceptions—all rooted in denial—are preventing policymakers from appreciating the gravity of the crisis in Europe, which represents the greatest threat to the global economy since the Lehman debacle.
The ability of the service sector to generate growth is widely underestimated. So long as country avoid taking protective measures and harness their competitive advantages, countries should welcome larger service sectors.
To save the euro, Europe must not only put out the immediate fire, but also act to prevent future fires by layering both fiscal and political unions on top of its currency union.
Although Cannes provided the United States and the broader G20 with an opportunity to rescue Europe from its current economic turmoil, the G20 did not make the tough decisions necessary to end the Eurozone crisis.
The European leaders’ emergency summit featured plenty of headline-grabbing numbers, but far fewer actual commitments and details. It will not save the eurozone, but it will allow it live on to fight the next battle.
