The euro is on the verge of collapse, and the responsibility for rescuing Europe's single currency and, most of all, averting a global crisis is now with the G20. The Greek government's decision to call for a referendum on the second bailout has made the management of the crisis considerably more difficult. It is a game-changer.
It is now clear that Greece is on its own. The sixth tranche of €8bn in international aid has been suspended until Athens provides a clear signal of its intention to remain in the European monetary union. Whatever verdict the Greek referendum on the euro will deliver in early December, at this point is irrelevant. Greece is technically insolvent and the removal of the internationally-backed financial support may trigger a disorderly default even before Greek voters have the chance to make their minds up.
The likelihood of a Greek default and the subsequent contagion to other troubled countries like Italy and Spain has dramatically increased in the last hours. This has shifted the focus of the debate. The question is no longer what Greece – and by extension Europe – can do to save itself and to 'earn' the rescue funds. The focus is now on how to provide a deep and broad financial safety net for Europe's banking and financial system and how to build a strong firewall around Greece.
The details of the financial safety net need to be discussed, but it is likely to have several components: from the European Financial Stability Facility to support troubled eurozone countries, to the IMF's flexible credit line, as well as the traditional IMF programmes. €1 trillion is the amount that is deemed necessary to provide backing to Italy and Spain.
The fate of the whole euro area increasingly depends on the Italian government's ability to unveil and implement credible reforms. This could be possible if the current government steps down and a technocratic government is appointed. Silvio Berlusconi is no longer in control of a majority that would allow him to pursue the necessary reforms. In addition, the Italian government is deeply divided on what is required to restore fiscal stability and improve economic growth.
G20 leaders could add further pressure on Berlusconi for more clarity on whether his government can deliver short-term measures and longer-term reforms. If not, they should persuade him to step down for the sake of stability in the global economy. A technocratic government, with well-regarded public figures and experts, should then step in and 'reset' the country.
It is now apparent that a G20-led solution is the only way to put a decisive end to the euro crisis. Of course, any solution that involves a 'rescue' plan needs to include a plan for growth that looks at the immediate need of supporting economic activity to avoid a global recession, as well as action around the Pittsburgh framework for 'strong, sustainable and balanced growth'. With record highs in unemployment and discontent on the rise across the developed world, G20 leaders must resolve the crisis urgently and move quickly to concentrate on the other critical issues on their agenda.