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The G20 and Eurozone Debt Crisis

Interviewee: Steven Dunaway, Adjunct Senior Fellow for International Economics, CFR
Interviewer: Christopher Alessi, Associate Staff Writer, CFR.org
November 4, 2011

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The eurozone sovereign-debt crisis has overshadowed the G20 summit in Cannes, putting other issues such as currency stability and trade imbalances on the backburner. World leaders used the forum to urge their European counterparts to resolve political differences and implement a comprehensive euro rescue strategy agreed on last week. Besides offering encouragement, there is little else that the United States and other G20 nations can do to assist Europe, says CFR's Steven Dunaway. While there was talk at the summit of using the International Monetary Fund (IMF) to provide additional financing to the eurozone, Dunaway says the United States would ultimately oppose such a move. "The Treasury's position has been that Europe has adequate resources on its own to deal with this problem, and that Europe needs to martial its resources more effectively," he says. "This is a European problem."

What have been the major developments at the G20 Summit?

There hasn't been any major development. The focus has been primarily on the European crisis. Around the edges of that has been a discussion of having the IMF more actively involved in providing additional financing to Europe in the form of a new allocation of special drawing rights. What it would involve, essentially, is the IMF printing money, which is something that the Germans don't want the ECB [European Central Bank] to do. It would be a general allocation because they can't do it specifically for one country and not do it for all countries. It was thrown out as a way that some of the troubled European countries, in particular Italy and Spain, would be able to acquire some additional reserves that would help them to finance their budget situations.

Is there widespread support for such a move?

[The IMF] has the authority [to print money] with the agreement of 85 percent of its member countries. It did it last during the financial crisis. The United States has historically been very cautious in approving increases in special drawing rights, and I would guess that the Treasury is very strongly opposed to any kind of plan like this that would directly involve the IMF. The Treasury's position has been that Europe has adequate resources on its own to deal with this problem, and that Europe needs to martial its resources more effectively.

What kind of leadership role has the United States played at this summit?

This is a European problem. The Europeans have sufficient resources to deal with it on their own. For the United States and for the rest of the G20, there's only a very limited role they can play--and the Europeans want them to play this limited role in terms of providing more financial resources. But in terms of trying to influence the outcome, there's very little the United States and the other G20 [nations] can do, aside from encourage the Europeans to come to some kind of lasting solution to the problem.

President Barack Obama has called on his French and German counterparts to outline more details about last week's comprehensive solution to the sovereign debt crisis. Has he made any progress in flushing out the specifics of the plan?

In the context of this particular meeting, probably not. But it's an area where the Europeans know that they have to move forward, and given the events in Greece over the past few days, it's brought into focus even more the need to move quickly to define those details. It's probably helpful that the president puts in his two cents in favor of doing this, but there's already a tremendous amount of momentum in that direction.

There's very little the United States and the other G20 [nations] can do, aside from encourage the Europeans to come to some kind of lasting solution to the problem.

This discussion is proceeding on the implicit assumption that if you give the southern European countries time, they will adjust. The unfortunate thing has been, so far, the countries [Greece, Portugal, Spain, and Italy] have not taken meaningful steps to adjust their economic policies and their economic structures. Even if [EU leaders] reach some kind of agreement--and there's plenty of financing available to help these countries--if they do not become serious about adjustment and put in place necessary [austerity] policies, then all you've done is bought time.

What other issues did leaders address at the summit?

There was some discussion on China's exchange rate. There was also discussion of what role all the G20 countries can play in trying to improve the world's economic prospects. But at the end of the day, it's likely to be a rehash of what we've seen in the past several G20 leaders' summits, as well as in the finance ministers' meeting [in October]. It's going to be a repeat of all these policy pledges that countries have made in the past. Unfortunately, there's been very little progress made in actually fulfilling those pledges.

Why has it been so challenging for many countries to implement these promised economic reforms?

There's some very tough political tradeoffs in the major countries in terms of trying to put in place the needed policy adjustments. Here in the United States, [there is a] debate between the Republicans and the Democrats in terms of how to provide short-term stimulus to the economy while coming up with a credible, long-term fiscal solution.

There have been some very tough political tradeoffs in the major countries in terms of trying to put in place the needed [economic] policy adjustments.

In China, [there are] similar political problems; the Chinese are in the middle of a major transition in leadership, which occurs every five years. For the last year, nobody wants to stick their head out and stand out and make a strong policy stance, particularly in terms of needed measures to help rebalance China's economy and reduce its dependence on investment and exports, and increase its reliance on consumption to drive growth. A lot of focus is on the exchange rate question because that's one of the key factors in trying to bring about this rebalancing, but until decisions are made in November of next year, in terms of who gets what position in the new government [nothing will happen].

More broadly, are these G20 summits useful for maintaining global economic stability?

They are useful in terms of the direct exchange of views among the leaders about the policies of individual countries. They become extremely useful in circumstances where either policies or situations in one country can have substantial influences on what's happening in other countries. That was the case during the economic and financial crisis [in 2008-2009] where you had major international financial institutions teetering on the edge of insolvency. It was very important at that point for coordinated action.

In the current situation, there's less of that urgency. Granted, what happens in Europe is going to have a big impact on the rest of the world, but there's very little in terms of what the other countries can do that would have a direct impact on changing Europe's policies.

So there's that big difference in the situation now that makes the G20 look like it's less effective and less useful. But it's less useful only in the sense that there's little direct benefit that would come from coordinated action, and there's little incentive in this situation that would drive countries towards that coordinated policy action. But it's very useful, still, for the leaders to be able to exchange ideas.

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