G20 euro worries
June 18, 2012
The leaders of the twenty most important industrialized and emerging countries must be breathing a sigh of relief. Their annual summit this Monday and Tuesday (June 18 and 19) in the Mexican resort of Los Cabos begins on a good note: Greek voters chose the conservatives to be the strongest force in parliament in their elections on Sunday.
The leftist coalition Syriza had threatened to pull out of international austerity agreements, threatening Greece's future in the euro single currency and potentially creating an economic crisis throughout Europe. Without austerity, there will be no more money from the EU and Greece would be bankrupt in no time. That would have turned the G20 summit into a crisis meeting.
"If it came to a crisis in the eurozone, this would have corresponding effects on the world economy as a whole," Jörg Hinze from the Hamburg Institute of International Economics (HWWI) warned, citing the possible consequences of the never-ending euro crisis. "It would also set back emerging markets and especially the developing countries." Since the former are heavily dependent on exports, they have a heightened interest that "there will not be a return to economic collapse as in 2009-2010," he said.
Familiar topics on the agenda
The issues being discussed in Mexico are essentially the same issues that were already included in last November's G20 Action Plan at Cannes: the stabilization of the global economy and overcoming global imbalances, strengthening the financial system and further reform of the international financial architecture.
In Mexico, German Chancellor Angela Merkel wants to push for a much stricter banking regulation. "This demand has been on the table ever since the Lehman bankruptcy. However, it was only insufficiently implemented," Hinze said.
In response to the collapse of U.S. investment bank Lehman Brothers in September 2008, the EU inaugurated the "European System of Financial Supervision" (ESFS) just under two years later. It is intended to examine banks, insurance companies and stock exchanges closely and prohibit, for example, high-risk trading. "But this has achieved nothing," laments Peter Wahl of the non-governmental organization WEED (World Economy, Ecology and Development). "Bankia and the other Spanish banks have realized that it did not work, despite the stress tests on banks. In the U.S. there was the case of JP Morgan, where a loss accrued of between five to six billion dollars. And that bank had previously passed a stress test," Wahl said in an interview with DW.
Competitiveness prevents solutions
Wahl believes Merkel's demand "to restructure or shut down banks across national borders if necessary "is desirable, but not realistic." "One of the basic problems of this debate about banking regulation is that the politicians always return to a competitive mentality." The banking industry threatens to take its business from the eurozone to London, from Europe to the U.S., or Singapore and China, he said. "As long as you remain stuck in the logic of competition, you will always run into limits. You have to free yourself from it," said Wahl.
Competitive spirit will likely prevent an international solution to the other major topic of the summit, the transaction tax, which Germany is promoting heavily. "Some countries say openly that they are against it, such as Great Britain. Others, like the United States, say it is less open, but act accordingly," Hinze said. As long as a financial transaction tax is not introduced internationally, it is not very promising because transfers to tax-free stock exchanges are inevitable.
Savings or investment?
Ahead of the summit, it became apparent that the G20 states wanted to encourage financially strong countries like Germany and Canada to create greater impetus for growth. The Chancellor rejected these expectations shortly before the summit: Germany's strength is not infinite, Merkel said, and Germany should not be overwhelmed. Everyone is responsible for the stability of the global economy, including China and the United States, she said.
The German government is ready to stimulate economic growth through a capital increase by the European Investment Bank (EIB) and structural reforms. Merkel said she would not accept direct government stimulus measures by taking on new debt or common eurobonds to relieve the crisis countries.
For years, the US response to the domestic economic crisis has been to put together stimulus packages. "In the very short term, the American way is right," Wahl said. However, it should be recognized that in the long term another solution is needed and the revenue side of the state strengthened through an equitable tax policy, he said. But President Barack Obama is in the midst of his reelection campaign. An increase in taxes or international financial obligations, would be unlikely to pass muster with Congress at this stage.
Author: Mirjam Gehrke / sgb
Editor: Gregg Benzow