LOS CABOS (Mexico): Europe won support from world leaders yesterday for an ambitious but slow-moving overhaul of the euro zone, even as pressure built in financial markets for quicker solutions to its debt crisis that threatens the world economy.
Europe told a Group of 20 summit it intends to work on concrete steps to integrate its banking sectors, a major step long pressed by the United States and other nations to break the cycle of debt-laden countries bailing out their troubled banks which only pushes governments ever deeper into debt.
US President Barack Obama said the sense of urgency among European leaders was clear and they knew what steps were needed to “break the fever” of an escalating debt crisis.
“None of them are going to be a silver bullet that solves this thing entirely… in the next week or two weeks or two months, but each step points to the fact that Europe is moving towards further integration rather than break-up,” Obama told reporters at the end of the two-day summit in a Pacific resort.
US Treasury Secretary Timothy Geithner said a strengthened framework for a euro-wide fiscal and banking union to underpin the common currency would help restore Europe’s economic growth and lower painfully high borrowing costs for indebted countries.
International Monetary Fund chief Christine Lagarde hailed the progress saying “the seeds of a pan-European recovery plan were planted”.
“It doesn’t matter if it takes a long time, it has got to be done well,” she said, adding that immediate measures and longer-term ones must be pursued in parallel.
G20 leaders now await a European Union summit next week where European officials say they will launch the long process of deeper integration, starting with a push for banking union, with an aim of finalising a broad plan by December.
Canadian Prime Minister Stephen Harper, a critic of Europe’s progress to date, said it was now getting to the root of its debt crisis.
“What will be important, what we’ll be watching for next week and going forward will be the concerted, coordinated action that will actually make these things happen,” Harper said.
Financial markets have yet to be convinced about the chances of agreement. Germany has resisted taking on euro-wide financial risks if its citizens have to foot too much of the bill, while others, such as France and Italy, want to move more quickly.
Although the danger of Greece crashing out of the euro zone eased after weekend elections, risks are mounting that Spain, the euro zone’s fourth-largest economy, will need a full-blown international rescue as its longer-term debt yields hover above 7%, a level that has forced other euro countries to seek bailouts.
The tensions over the world economy and the round-the-clock discussions contrasted with the laid-back atmosphere of Los Cabos, a beach resort at the tip of Mexico’s Baja California.
The summit declaration was drafted at a hotel next to the adults-only, clothes-optional Desire Resort And Spa.
Timeline and path ahead
G20 leaders found common ground that Europe, the world’s richest region, must intensify its immediate efforts to stabilise indebted euro-zone countries while laying out a clear plan for building financial, fiscal and political union as the path to save monetary union.
“The Los Cabos G20 delivered more commitments than expected. The Europeans upped the ante and publicly committed to institutional upgrade for the banking system and fiscal situation of the EU,” said Yves Tiberghien, political science professor at the University of British Columbia.
Greece, Ireland and Portugal, overwhelmed by debt, have resorted to international bailouts and the EU last week promised funds for Spain’s banking system. But investors see these as stop-gap measures until Europe commits to deep budgetary and political integration, sharing risk at the European level.
This would require euro-zone nations to give up more sovereignty and share economic costs, steps that EU leaders say will take time among the 17 democracies that share the currency, especially for Germany which would foot the largest bill.
All necessary steps
In the G20 communique, euro area countries pledged to “take all necessary policy measures” to safeguard monetary union.
Europe also intends “to consider concrete steps towards a more integrated financial architecture”, including common banking supervision, bank recapitalisation, winding down of failed banks and guarantees for bank depositors, it said.
These steps would help break the link between government debt and banking problems. Combined with fiscal discipline and measures to support growth, they represent “important steps toward greater fiscal and economic integration” that lead to lower borrowing costs, the G20 communique said.
Other G20 countries also signed up to measures designed to support a global economy that has slowed to about a 2.5% pace. Those with budgetary leeway stand ready to coordinate on fiscal stimulus measures, if economic conditions deteriorate significantly. The United States pledged to avoid a potential big shock to its economy in early 2013 when tax cuts are due to expire and spending cuts take effect, the communique said.
Europe’s success in Los Cabos was to explain to the G20 the political challenge of overhauling its 17-nation monetary union.
Other G20 leaders conveyed the urgency of having a clear plan. One EU official said that the push for banking union can proceed most swiftly while the vision of a European fiscal union will take longer.
No less challenging was moving around the resort town which was teeming with Mexican military and police. Tight security stalled traffic and meetings were delayed. Russian Finance Minister Anton Siluanov had to make his way on foot after his car in the presidential motorcade was blocked by security.
Italy put forward a potentially controversial proposal for the euro zone’s rescue funds to start buying debt of stricken euro-zone countries, such as Spain and Italy, to start lowering their financing costs, European officials said.
French President Francois Hollande said the idea was worth exploring. Italian officials have said the plans would be discussed at a meeting of finance ministers this week. But Germany said no specific initiative was discussed in Los Cabos.
G20 leaders left little doubt that Europe is critical to stabilising the global recovery. Obama carefully spelled out to fellow G20 leaders the risks to growth in an interlinked globe, diplomats said. He showed how each region is heavily dependent on demand from the EU, the world’s largest economic bloc, for their exports and investment.
“He read out the figures, how much India, China, Korea, etc, how much they each depend on Europe and the European Union in an integrated global economy,” a G20 official said.
Development groups complained that Europe’s troubles have hijacked the G20 agenda and pushed into the background its work on addressing poverty and food shortages.
“Political courage seems to be in short supply in Los Cabos,” said ONE, a global anti-poverty group founded by rock star Bono.