Since the eurozone crisis first erupted three years ago it has largely been seen as Europe’s problem. It has now become a global emergency.
This crisis is “scaring the world” says President Obama, whose Treasury Secretary Timothy Geithner visited Europe twice in a week to meet European finance ministers and who has demanded speedy action in the strongest language, warning of “cascading default, bank runs and catastrophic risk”. Such US criticism looks a bit rich in the wake of the great American budget row, but it seems that when Europe sneezes, the whole world may catch pneumonia.
The G-20 has been mobilised to put co-ordinated pressure on the Europeans, while the International Monetary Fund is becoming a central player in a desperate campaign to avert global recession. The question is whether the IMF has the firepower to meet the challenge. In the few short weeks leading up to the G-20 summit in Cannes on November 3-4 an action programme must be devised to instil new confidence into the global economy and restore faith in the markets. Six weeks to save the euro, says UK finance minister George Osborne. Six weeks to save the world economy, some say.
A whole raft of ideas is in the air. One is to gear up the €440 billion EFSF by borrowing against it, so creating a fund of €2 trillion; another is a 50 per cent haircut of Greek bonds, allowing default by any other name but keeping Greece in the eurozone, with new funds provided to the banks by the ECB to strengthen their balance sheets. These are all variations on the piecemeal measures already adopted, too little and too late, by Europe.
Angela Merkel stresses the need for a step-by-step approach – or perhaps day-by-day would be more appropriate. She doesn’t want to frighten the horses in advance of Thursday’s meeting of the Bundestag, which will vote on the European Financial Stability Facility, so she does not welcome talk of Greek default or the creation of eurobonds.
The markets must not be allowed to dictate policy, she says, and she reassured Greek prime minister Papandreou of Germany’s support on this week’s visit to Berlin. The crisis was a debt crisis, she said, not a euro crisis.
It does look as if the German Chancellor will win the vote on Thursday with opposition support, but whether she can take her coalition partners with her is another matter. There is particular concern among FDP members over the possible expansion of the stability fund.
Ratification of the fund has other hurdles to overcome, but the Slovenian parliament has now given its approval. There follows Wednesday’s vote in the Finnish parliament, which has been negotiating “collateral” with Greece as a condition of supporting the bail-out plan, and Slovakia, voting on October 11, which hates the idea of bailing out a wealthier neighbour, but is nonetheless likely to give its approval. Tuesday’s approval by the Greek parliament of a new property tax should underpin support in these countries.
Approval of the EFSF will no doubt help to soothe the markets in the short term, but it now seems clear that global support will be needed to restore long-term stability to global markets and head off recession. This will inevitably involve China, India and other developing economies, marking a further shift of economic power across the world.