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 Why the G-20's Summit in Cannes Cannot Fail

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PostSubject: Why the G-20's Summit in Cannes Cannot Fail   Tue Oct 18, 2011 10:06 am

October 18, 2011

Why the G-20's Summit in Cannes Cannot Fail

Be prepared for some slick choreography when leaders from the Group of 20 largest economies meet in Cannes early next month.

We don't know exactly what French Finance Minister François Baroin and German Finance Minister Wolfgang Schaüble told their counterparts from other G-20 nations last weekend in Paris, but whatever it was seemed to meet with cautious approval.

Having pleaded with euro-zone policy makers to get on top of the region's twin fiscal and banking crises, U.S. Treasury Secretary Timothy Geithner and Brazilian Finance Minister Guido Mantega both declared themselves encouraged by what they had heard.

But then they don't have much choice, and nor will their bosses when they gather on the shores of the Mediterranean. That's because the Cannes summit cannot fail.

As G-20 finance ministers and central bank chiefs met in Paris, it appeared Germany and France had settled on a way of adding to the European Financial Stability Facility's firepower without themselves making any further commitments to it—what the G-20 calls "leveraging."

They also agreed that the euro zone's banks need to beef up their capital, though over a period of months, not weeks, and preferably using private-sector resources.

And the euro zone's leading members also moved closer to imposing a debt restructuring deal that would give Greece some hope of repaying some of its bonds without utterly impoverishing its people.

European Union leaders will convene in Brussels on Sunday, and those G-20 members that have the good fortune not to use the euro have made it clear what they expect them to do: "decisively address the current challenges through a comprehensive plan."

No wonder. Some of the spillover effects from the euro- zone crisis are real and tangible. Slower growth in the currency area will depress its demand for exports from other nations, including commodities.

And the bloc's banks are big players in global finance. The European Bank for Reconstruction and Development on Tuesday slashed its growth forecasts for Central and Eastern Europe because it believes the difficulties faced by Western European banks will limit credit availability in the region. Similar effects will be felt to a lesser degree almost everywhere there are banks.

But much of the spillover is less tangible, and takes the form of damaged business and investor confidence. To reinvigorate the animal spirits, G-20 leaders will have to put the best possible gloss on whatever plan the euro zone does come up with. Unless that plan is plainly and embarrassingly deficient, it will get the stamp of approval from U.S. President Barack Obama, Chinese President Hu Jintao and anyone else who doesn't want to see their economy go down the pan.

Of course, it adds to the value of the final endorsement if the euro zone's approach to its crisis is subject to scrutiny and often blunt criticism as it is being developed. So G-20 leaders have to convince investors that they have been suitably rigorous in their appraisal if their final approval of the euro-zone proposal is to carry any weight.

Canadian Finance Minister Jim Flaherty played his part Monday during a visit to one of the three countries that have already fallen victim to the crisis.

"If this crisis is left unaddressed, it will eventually become too big for Europe to solve," he told an Irish-Canadian business group. "Delays will only make necessary choices more difficult, and this crisis more costly."

That's not to say the euro-zone plan will fall far short of what is needed. It's not going to do anyone's credibility much good if a plan endorsed by world leaders on Friday is unambiguously rejected by investors when they start trading on Monday morning.

But the G-20 leaders' band of tolerance is wider than they might suggest right now.

As politicians, they know that what they get from their euro-zone counterparts is the result of a political process. In the words of a former German chancellor, the comprehensive plan will be the product of "the art of the possible," rather than some objectively adjudged best conceivable option.

So unless they are convinced that France's Nicolas Sarkozy and Germany's Angela Merkel haven't done everything their political capital will allow, it doesn't make a great deal of sense for them to reject the plan. Their best
short-term strategy would be to give it their emphatic rhetorical support.

What is unclear is how much more than rhetorical support they are prepared to give. For some months now there have been suggestions and hints to the effect that the more cash-rich developing economies might help boost the resources available to halt contagion from Greece, although the precise mechanism for doing so hasn't been defined.

In the weeks to come, it would certainly make sense for this option to be kept open—the mere possibility that China's trillions might be available could help reassure investors, and why rule that out if it is helping underpin fragile confidence?

But taking money from the still quite poor to give to the still quite rich doesn't seem like an idea that even politicians in as secure a position as China's leaders could easily justify.


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