Eurozone debt woes overshadow G8 Camp David summit
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E-mail Xinhua, May 20, 2012
The simmering eurozone debt crisis loomed over a gathering of Group of Eight (G8) leaders hosted by U.S. President Barack Obama at Camp David, but the two-day summit offered no silver bullet to cure the two-year-old crisis which shed light on the fundamental weakness of the euro project.
CRISIS EPICENTER
In former European Central Bank (ECB) head Jean-Claude Trichet's view, the eurozone is now the epicenter of the global economic crisis. The world economy has been on "what is best described as a roller coaster" for the last six months, to borrow the International Monetary Fund (IMF) chief economist Olivier Blanchard's words.
"This morning, we're going to be spending a lot of time on economic issues. Obviously the eurozone will be one topic," Obama said on Saturday before kicking off the working sessions of the summit.
A string of bad news weighed on investors' confidence in recent weeks. Global rating agency Fitch has slashed Greece's rating from B- to CCC, the lowest possible grade for a country that is not in default, on heightened risk that Greece could leave the euro area.
Greece is expected to conduct a second round of election next month with an anti-bailout leftist party ahead in the polls, in a bid to resolve the political stalemate after the May 6 national election that produced a legislature divided among supporters and critics of the austerity measures mandated by the global rescue package.
At issue is whether Greece exits from the eurozone to escape austerity policies, a once taboo topic that global leaders have begun to discuss openly. Experts including IMF chief Christine Lagarde have warned of "extremely expensive" consequences of Greek departure from the currency bloc.
G8 leaders expressed their strong wish to keep Greece in the eurozone, saying in a statement that "we agree on the importance of a strong and cohesive eurozone for global stability and recovery, and we affirm our interest in Greece remaining in the eurozone while respecting its commitments".
The fate of eurozone is also critical to Obama's own political survival, as he has geared up the reelection bid. "A stable, growing European economy is in everybody's best interests, including America's", Obama told reporters after the G8 summit concluded.
FRAGILE BANKING SECTOR
Prior to the gathering of leaders of major economies at the heavily-guarded presidential retreat in Maryland, the U.S. stock market has been in a slump over the past two weeks, on fresh risk triggered by Greek political deadlock and fragility of the eurozone banking system.
Earlier this week, another global credit rater Moody's Investors Service downgraded the long-term debt and deposit ratings for 16 Spanish banks, on the heels of its decision to downgrade 26 Italian banks. Experts held that Spanish lenders were exposed to large amount of soured investments in the real estate sector, a leftover from the financial crisis for several eurozone economies.
Investors were also rattled after a report showed customers at Bankia, a leading bank in Spain, had withdrawn more than 1 billion euros from their accounts although the Spanish government said there had been no deposit flight from the lender.
Bankia has been considered a litmus test of the government's efforts to fix the country's banking sector, but uncertainty over how much the banking sector rescue would cost the government has stirred up market jitters, as investors worried that Spain and Italy may follow suit after Greece, Portugal and Ireland and turn to global rescue from their European partners and the IMF.
G8 leaders offered no specific steps to beef up the fragile banking sector except for pledging to take all necessary steps to combat financial stresses.
HIDDEN WEAKNESS
The eurozone nations find themselves at a delicate crossroads as the survival of the 13-year-old single currency was threatened by the ongoing Greek political crisis. The euro area was established before a fiscal union was in place, the Achilles' heel of the region.
The euro crisis is a "direct consequence" of the crash of 2008, as the entire global financial system had to be put on artificial life support, which took the form of substituting the sovereign credit of governments for the banks, billionaire investor George Soros observed.
However, German Chancellor Angela Merkel insisted that the guarantee for the financial sector should be exercised by each European state individually, not by the European Union or the euro area as a whole. This sowed the seeds of the eurozone crisis, because it revealed and activated a hidden weakness in the construction of the euro project-- "the lack of a common treasury", Soros contended.
Given domestic political bottlenecks in countries like Germany, some economically viable solutions including establishing a federal European Treasury and issuance of common Eurobonds in a timely manner were politically impracticable up to date.
As expected, the Camp David summit led to little concrete moves on how to strengthen growth and tackle the currency bloc's structural weakness. The declaration made at the rustic retreat did not touch upon those fundamentally important proposals.
For the European Union, a full-fledged America-style Europe where states cede a large chunk of fiscal authority to the federal government appears politically unpalatable, Trichet said at an event hosted by the Washington-based think tank Peterson Institute of International Economics (PIIE) earlier this week.
A centralized EU budget is a "quantum leap" of European governance, and is necessary for the next step of European integration, noted the former ECB chief, who retired last fall after an event-packed reign.
Some economists believed the roller coaster scenario might continue in the euro area, as the political will to address the fundamental weakness is missing, so European policymakers will only do the minimum in the foreseeable future, and that will soon be perceived by investors as inadequate.
AUSTERITY VS. GROWTH
Before kicking off the summit, Obama hosted the newly elected French President Francois Hollande at the White House. Hollande was one of several European leaders who came to office partly due to voters' dissatisfaction with the predecessors' austerity policies.
"Austerity versus growth is very much the debate of the hour," Lagarde observed earlier this month, noting that global policymakers should strike a balance between austerity and growth in designing economic policies to deliver faster and better growth.
One positive sign for the eurozone's beleaguered economies was that growth was given more attention at this summit, as the G8 leaders announced in their joint declaration that "our imperative is to promote growth and jobs."
Experts including Nobel Prize-winning economist Paul Krugman held that eurozone should spend its way out of the recession, noting that Merkel-style spending cuts in a depressed economy make the depression deeper.
Obama who tackled the most severe economic recession in decades by rolling out a massive round of stimulus steps supported a strong growth agenda on the other side of the Atlantic Ocean, saying that "the direction the debate has taken recently should give us confidence".
Obama's policy priority was echoed by Hollande, but Obama could give no tangible support to Europe while several of his own job creation bills were killed by his rival Republican lawmakers.
The high-profile discussions pitched efforts to boost growth favored by Obama and Hollande against debt reduction efforts demanded by Merkel. The policy divisions remained obvious in the declaration.
"We welcome the ongoing discussion in Europe on how to generate growth, while maintaining a firm commitment to implementing fiscal consolidation to be assessed on a structural basis," said the leaders, adding that "the right measures are not the same for each of us."
In the medium term, eurozone nations have to carry out austerity measures to win market confidence, but in the short run, the key is how much austerity is needed, Jacob Kirkegaard, a senior fellow at the PIIE, said in an interview.
Austerity should be adopted in a way not to hamper economic growth in countries like Spain, Kirkegaard stressed.
The Camp David summit came ahead of a critical meeting of EU leaders on May 23 to discuss how to support growth and save the euro, a new platform for debates between Merkel-style austerity and Hollande-style stimulus.
