G20 leaves it to eurozone

Europe's problems are still in search of a solution

Last weekend’s meeting of the finance ministers of the G20 countries has not produced any breakthroughs in terms of the immediate crisis facing the group, namely eurozone; the matter has, therefore, been left to be resolved by the eurozone countries, who are meeting separately this coming weekend. The proposal to give greater financial firepower to the International Monetary Fund came a cropper, as countries ranging from the United States to Australia were all opposed; judging by the admittedly scanty reports. India seems to have sat on the fence but may have been willing to go along, unlike some other Brics countries. India’s focus at the meeting seems to have been on greater information sharing with regard to bank transactions and related tax issues in offshore financial centres. It may have been encouraged to go in this direction by the progress that at least two countries have made in persuading the Swiss authorities to either become more transparent with regard to information or make good on tax evaded. On another big test, the re-balancing of the world economy through a mutual assessment programme that would monitor and address issues in specific countries, there seems to have been little progress because China continues to be obdurate on the revaluation of the yuan; indeed, currency valuation was barely discussed, if at all.

For all that, the markets have become hopeful in the last few days that the eurozone’s problems are closer to solution, as people pin their faith on the meeting of the leaders of eurozone countries next Sunday. Whether these hopes will prove to be justified is of course the big question. There is room for optimism because of the greater realism that now prevails. There is growing recognition that the Greek rescue plan will not work, because too much is being asked of Greece in terms of policy adjustment and financial sacrifices; and therefore recognition also that private lenders will have to take a bigger hair-cut on their loans. At the same time, the leaders of Germany and France are showing determination to do what needs to be done, and this could well lead to the inevitable re-capitalisation of European banks, and greater financial firepower being made available to the European Financial Stability Facility. The big question, which has no answer yet, is where the money will come from for the rescue plans and bank recapitalisation. If, in the final analysis, the more prosperous countries of northern Europe have to pick up the tab – and that is the real message from the G20 meeting – then the decision-making process could be slow and also a captive of responses from free-flowing financial markets. In short, it is too early to say whether Europe has managed to get on top of its problem; on balance, the world’s largest economic bloc still seems to be searching for viable solutions.