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Did the G20 Help the Eurozone?

Interviewee: Jacob Kirkegaard, Senior Fellow, Peterson Institute for International Economics
Interviewer: Christopher Alessi
June 20, 2012

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The eurozone sovereign debt crisis dominated the G20 leaders' summit (WSJ) in Los Cabos, Mexico, June 18-19, as the United States and other G20 members struggled to secure Europe's commitment to a concrete timeline for further political and fiscal integration. "The United States and the G20 as a whole have very limited leverage over the intra-euro area political process of integration," says the Peterson Institute's Jacob Funk Kirkegaard. Still, Kirkegaard applauded the euro area's public and "detailed commitment" to banking sector integration and reform, saying "quite far-reaching announcements on this issue" should follow the June 28-29 European Council summit.

What were the main takeaways of the summit?

The two key takeaways are: first, the additional commitment of funds to the IMF by the large emerging markets, which indicates that they have accepted to continue a longer-term process of IMF quota reform, despite the Obama administration's inability to get Congressional approval for the 2010 agreement before the October 2012 deadline. Secondly, it is the detailed commitment of the euro area, which "will"--rather than intend, or should--"take all necessary measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks."

What concrete steps, if any, did the United States and other G20 countries convince Europe to take to more forcefully tackle the eurozone sovereign debt crisis?

Little. The reality is that the United States and the G20 as a whole have very limited leverage over the intra-euro area political process of integration. The detailed commitment to banking sector integration, however, is a positive.

What's next for Greece now that it has formed a new government and agreed to abide by its EU-IMF bailout agreements?

The Greek government will get the political commitment to ease austerity at the coming European Council meeting next week, and the imminent troika [Greece's international creditors--the European Commission, European Central Bank, and International Monetary Fund] visit will hammer out a revised bailout program, tweaked mostly at the margins though.

What are EU leaders doing to address the worsening situation in Spain, highlighted by rising government bond yields?

The urgency of banking sector integration is clearly driven by events in Spain, and we should expect far-reaching announcements on this issue at the upcoming European Council [meeting]. Provided that there is the political commitment to integrate euro area banking sector regulation (e.g. a handover of sovereignty), it is probable that bond market interventions in Spain and Italy will resume by the ECB and/or the European Stability Mechanism or the European Financial Stability Facility [the eurozone's rescue funds].

What's the relevance of an informal organization like the G20 in alleviating the eurozone situation and other global economic crises?

[The G20] is quite useful in an acute crisis to coordinate global policy interventions. Yet, absent an acute crisis--like in early 2009--the G20 cannot independently make a difference for global policymaking. Its principal benefit in 'normal political times' is therefore in the informal meetings among heads of state at the sidelines--this time symbolized by the announcement of Mexico and Canada joining the Trans-Pacific Partnership [trade] negotiations.

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