US Treasury Secretary Tim Geithner’s participation at last week’s meeting of EU finance ministers was not enough to deliver a convincing response to the eurocrisis, one based on shared solutions and policy coordination.
It is becoming increasingly clear that restoring confidence to the markets will require a globally coordinated solution, or a G20 solution – perhaps even to a greater degree than what was required to stem the financial crisis of 2008-09.
European leaders are stuck in the impossible situation of squaring principles with the need to help Greece manage its debt obligations and introduce structural reforms. The situation has escalated to such a heated and, at times, emotional confrontation that the involvement of non-euro leaders is needed to help rebalance the debate.
Furthermore, Europe’s crisis has developed in such a way that it is now a global problem. Given the global implications of policy failure, the solution has to be global.
But, the context for a solution is not favourable with worsened macroeconomic conditions in Europe and in the US, and weakened political willingness and financial ability to support troubled eurozone countries.
Securing further funding for Greece will require it to push unpopular measures through a reluctant parliament. Risks and uncertainties remain high. However, the European Commission has so far endorsed the country’s efforts and this should pave the way for the disbursement of the next loan tranche in October.
The biggest hurdle will come when various eurozone parliaments have to approve both a financial rescue for Greece, at a total of €109bn, and the expansion in size and scope of the European Financial Stability Facility (EFSF).
The EFSF has been designed to provide an effective, albeit potentially underfunded, mechanism to fight the debt crisis. But it is ineffective until it becomes fully operational, while tensions surrounding its approval process are likely to amplify market uncertainty and volatility in the weeks ahead. Even in a best case scenario of a quick and seamless approval, it will take weeks for the EFSF to become operational.
There is a need for urgent action. Further delay in sending a clear message - that the political determination to support the Economic and Monetary Union is matched by concrete policy measures – could lead to the disorderly breakdown of the currency union, through Greece’s disorderly default. Even if it is difficult to quantify the impact of the dissolution of EMU, it is likely to be systemic and global.
A G20 solution is therefore needed, where countries agree to pull together resources to provide the eurozone with a flexible credit line to stand in, allowing time for the EFSF to become operational. China and other 'surplus' countries could take the initiative to call for a global rescue of the euro area on the understanding that it is in no-one’s interest to test the resilience of EMU to the last possible act. Moreover, providing a credit line would be a less risky solution than supporting the euro through intervention in the bond market, with no disbursement of funds until it is actually needed.
Political vision and leadership will shape the outcome of Greece’s next funding round and, by extension, the euro-crisis. Although dressed in stale rhetoric and inconsistent action, the commitment to not let the euro go down is certainly there. What is needed now is to reconnect words and action, not just in the eurozone, but across the G20.