When world leaders converge on the French resort city of Cannes today for the summit of the Group of 20 nations, they’d better bring a sense of urgency.
Europe’s deepening sovereign debt crisis is threatening a collapse of confidence that could rip through global credit markets, depriving countries and companies of the financing they need to function. European growth is petering out as unemployment returns to euro-era highs. The U.S. is growing far below its potential. A slowdown in China, meanwhile, makes it unlikely that emerging economies can pick up the slack. The Organization for Economic Cooperation and Development estimates that if the world gets a shock similar to the financial turmoil of 2008 and 2009 -- something a disorderly Greek default could easily generate -- major economies could shrink at an annualized rate of 5 percent by the first half of 2013.
There’s plenty of blame to go around for such a dire state of affairs. European nations united their currencies without properly coordinating their fiscal policies, and are now dealing with the consequences. The U.S. failed to see the dangerous leverage in the financial system and encouraged consumers to take on obligations that will weigh on its economy for years. China’s export-led growth model, undervalued currency and poor social safety net fostered vast trade imbalances that helped push the developed world’s debt burden to the highest point since the aftermath of World War II.
Now, though, is no time for world leaders to lecture one another. Fixing their problems will be much more difficult if the financial system buckles and the global economy heads back into recession. The collective debts of advanced-nation governments, net of assets, amount to about 69 percent of gross domestic product, according to the International Monetary Fund. If economic growth in the advanced world is just one percentage point lower, governments collectively will need to find added budget cuts or tax revenue of about $300 billion a year to keep the debt-to-GDP ratio steady.
Hence, the G-20 needs a growth agenda. Here are a few suggestions:
1. Europe should find the 3 trillion euros ($4.1 trillion) needed to put an end to its debt crisis. Greece’s political turmoil demonstrates that austerity alone won’t solve Europe’s problems, and that the latest rescue plan didn’t go far enough. Greece and probably Portugal need to shed much larger chunks of their debts, banks need to raise a lot more capital, and officials must provide guarantees large enough to ensure the financing needs of solvent governments. The repercussions of failure would be global, so it would behoove countries outside Europe to pitch in more, perhaps through the International Monetary Fund.
2. The European Central Bank should do more to support growth. Holding its target interest rate at 1.5 percent, and balking at buying more government bonds, makes little sense when the euro area is on the brink of -- or already in -- a recession. The Organization for Economic Cooperation and Development forecasts growth of only 0.3 percent in 2011.
3. The U.S. should adopt more aggressive measures to stimulate its economy. President Barack Obama has already proposed expanding a payroll tax break, increasing spending on public works projects and extending unemployment benefits. Without any action, the withdrawal of federal stimulus will shave 2 full percentage points off growth next year, and more in 2013, economists at Deutsche Bank estimate. Beyond that, principal writedowns for struggling mortgage borrowers would reduce consumer debt burdens that are weighing on growth.
To make room for such moves, leaders of advanced nations must also come up with credible plans to get their debts under control in the medium term. Even that, however, depends in large part on restoring growth now.
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