The G20 Seeks to Prove its Usefulness

Written by Oscar Montealegre, Contributor | 16 June 2012

Now is the time for the G-20 Summit to demonstrate to the world its true value and usefulness. The seventh meeting of the G-20 heads of government will be held in Los Cabos, Mexico, from June 18th to 19th, with a large amount of added pressure due to the present European debt crisis. The summit cannot afford an outcome of much ado about nothing.

The current international economic environment's current diagnosis is that the global economy is once again showing concerning signs of weakening because of the following reasons: (1) the European sovereign debt crisis reaching levels similar to Lehman Brothers 2008, with Spain, Italy, Greece, Portugal and Italy needing drastic financial aid; (2) the Euro zone is bracing for a Greece exit, increasing the risk of contagion and EU’s further fragmentation; and (3) significant slowdown is showing in emerging markets such as Brazil, India, and most surprisingly, China.

The best-case scenario would be if the participants of the G-20 initiate a concerted effort in formulating real and legitimate strategic plans towards stabilizing the global economy. So far the projection has been mixed. According to a European official who briefed reporters last week, the European leaders are more focused on creating a consensus for the EU meeting later this month. He insisted the G-20 should not be only about Europe, but about international issues. In short, do not expect an announcement of a grand strategy.

China is anticipating a more optimistic outcome. Chinese foreign ministry spokesman Liu Weimin suggested that leaders of developed and developing (emerging markets) nations should rally behind Europe, and give the EU a vote of confidence in resolving the sovereign debt issue. By the way, China should be very concerned about Europe: the Old Continent is China’s largest export market, and growth in China fell to 8.1 percent from 9.7 percent a year earlier, partly due to Europe’s economic contraction that has cramped its imports from China - and the U.S as well.

Interesting enough, the G-20’s agenda depends on the Greek elections taking place on June 16th. If the hard-left Syriza party wins, it could set off a chain reaction of cataclysmic effects in the bond and stock markets. Syriza leaders have been vocal in denouncing all bailouts and the German-led austerity measures. They propose defaulting on their debt obligations - a la Argentina - and an absolute Greece exit from the European Union and the Euro. If this scenario does occur, the G-20 will undoubtedly will become the war room of mitigating investor panic, bank runs, and bond spreads rising to unprecedented levels.

Currently, yields on Spanish 10-year bonds are at approximately 6.78 percent, Italy’s yields on 10-year bonds are nearly 6.29 percent, while Germany’s yields on their bonds are at an envied 1.35 percent. In short, Spain and Italy have to borrow money at a much higher cost, at least 5 percent more then Germany. Both Italy and Spain will not be able to handle their current deficit if they have to borrow at rates that they are not accustomed to since the Euro was introduced. Moreover, Moody’s credit agency lowered Spain’s investment grade rating from A3 to Baa3, barely one notch above junk status. It is not a rosy picture in Europe. Although highly unlikely, if the Syriza party does win the Greek election with a large mandate, the ensuing global financial panic could lead to another mayhem scenario identical to the 2008 crisis.

If the worst-case scenario does not play out, then the summit will adhere to the standard agenda set by Mexico. Priorities such as proposed reforms to stimulate growth and employment, strengthening of financial systems, mitigating negative effects on commodity price levels and volatility, and promoting sustainable development concentrating on infrastructure, green growth and energy efficiency. These topics may not be as "newsworthy," but it is a much better alternative than a new global financial crisis.

On a side note, the G-20 is gradually giving credence to the notion that new international actors such as China, Brazil, South Korea, Australia, India, and Mexico are solidifying their voice and say in international matters. Another development on the bargaining table is the proposed increase of IMF’s financial firepower. Japan, surprisingly enough, has led the charge by pledging $60 billion, while rumors exist that China plans to pledge the same amount. Brazil too is expected to take part in increasing IMF funding but with certain caveats, a solid promise that emerging markets will have more say (through voting power) at the IMF's table. The U.S. has not got on board in increasing IMF funding, thus, many countries have retracted their pledge or stayed mute on this particular issue. With the U.S. presidential elections looming in November, President Obama is well aware that allocating more funds for the IMF will not be received positively by the American public.

Although multiple issues will be discussed, the European crisis will be the top priority. The G-20 must take advantage of the opportunity in facilitating a realistic strategy that can calm the financial markets and narrow the rhetorical and political gap between the Northern European nations of Europe (Germany and co.) with their Southern (Mediterranean) counterparts. The cynic may suggest that if Europe itself cannot agree on reaching a viable solution or consensus, how can leaders from the U.S, Asia, and Latin American improve matters. A valid argument, but sometimes the stakes are so high that the problem no longer be approached exclusively to a certain region, especially in financial matters, and it steadily becomes a global issue, for better or worst. A vote of confidence from the G-20 will help the European cause, but much more is needed: a plan, a compromise, multiple solutions, and then, implementation.

Photo: Adolfo Jasso (cc).