Yet another European sovereign debt crisis plan is expected to be unveiled soon by European leaders. Squabbling over its specifics and recent experience suggest the effort will be a day late and a euro short, doing little to slow Europe’s slow motion economic train wreck.
Too much is at stake for the world to continue to treat the euro’s problems as purely a European responsibility. It is time for other nations that have too much to lose from Europe’s meltdown to come to the euro’s rescue in return for Europeans’ commitment to boost their bailout war chest, to further tighten their budgetary belts and to put in place stronger policies to avoid a recurrence of the crisis.
The European Financial Stability Facility is woefully inadequate for this task. In response to pressure from financial markets, euro-area governments are discussing expanding both the scale and the role of the fund. But the compromises needed to reach a European consensus almost ensure that any such effort will fall short of what is necessary if Spain’s woes worsen or if Italy or Belgium get in trouble.
As the Great Recession deepened in early 2009, the G20 governments boosted their public spending to stimulate economic recovery. It worked. Now it is time for the non-European members of the G20 to come together in a similar economic rescue effort.
Tokyo has already shown the way for such a G20 initiative. The Japanese government is willing to buy up to 20 per cent of any bonds issued by the European bailout facility. Other G20 members need to make similar commitments, possibly based on some fraction of their foreign exchange reserves.
The United States and deep-pocketed Saudi Arabia should take the lead. Smaller economies, such as India and Brazil, could make proportionately similar, but smaller bond purchases. Such an effort would lower Europe’s borrowing costs and help calm financial markets.
China has already promised to buy Greek, Portuguese and Spanish bonds in a largely symbolic effort to increase its influence in Europe. Given its massive foreign reserves, China should be encouraged to do more. But as Washington, Delhi, Seoul and other G20 governments attempt to counter China’s aggressive trade and foreign policies in other parts of the world, it is not in their interest to allow Beijing to act on its own in Europe. China’s contribution should be part of a multilateral, not a unilateral effort.
There are no free lunches. In return, the Europeans need to agree to dramatically increase the size of their bailout facility to dissuade financial markets from further testing Europe’s resolve. Tighter fiscal discipline must be put in place. And Europe needs to commit to collective policies that will avoid the wide disparities in economic performance that led to the crisis in the first place.
A G20 European bailout will not be easy to orchestrate. In 2009 spending coordination was initially resisted by many governments. G20 taxpayers will undoubtedly resist bailing out what they see as profligate Europeans. But buying European bonds is better than allowing the European debt crisis to snowball out of control, risking another recession.
In a world of global financial markets, deeply integrated trade and investment and skittish investors, continued European foot dragging in dealing with its sovereign debt crisis can no longer be tolerated. The rest of the world has too much at stake. It is time for the G20 nations to come to Europe’s defense, not out of altruism, but in their own self interest.
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