Mexico City G20 Meeting: European Debt Crisis Tops Agenda

Euro

First Posted: 02/25/2012 7:23 am Updated: 02/25/2012 10:56 pm

MEXICO CITY - Pressure mounted on Europe Saturday to build an even bigger financial stabilization fund to head off sovereign debt concerns, with the United States, Brazil, and the Organization for Economic Cooperation and Development all urging an increase.

While the advice coming out of a meeting of G-20 finance ministers, senior officials and central bank heads seemed overwhelming, Germany — Europe's main financial engine — appeared loath to fund yet another increase to stabilization funds that already have about 500 billion euros.

Angel Gurria, the head of the Organization for Economic Cooperation and Development, set the tone at the conference, calling for about $1.5 trillion in "firewall" funds aimed at restoring confidence in European countries' debt.

"We still have to build the mother of all firewalls," Gurria said. "The thicker the firewall is, the less likely we'll have to use it."

Guido Mantega, the finance minister of Brazil, said "there is a very strongly shared opinion that first, the European countries should strengthen their firewall."

"The emerging countries are only going to help under two conditions," Mantega said. "First, that they reinforce their firewalls, and second that reforms are implemented in the International Monetary Fund." Brazil wants more representation for developing nations in the U.S.-led IMF.

Many want the IMF, which is already participating in European stabilization, to do more.

U.S. Treasury Secretary Timothy Geithner added to the pressure, saying "I hope that we'll see, I expect that we'll see continued efforts by the Europeans ... to put in place a stronger, more credible firewall," though he didn't mention any amount.

Geithner acknowledged the work of European leaders, saying they have "made quite a bit of progress in convincing the world that they are not going to allow a catastrophic financial failure" in their countries.

But he also noted, "It's important not to rest on that progress, and recognize that progress is there in part based on the expectation that there are more things to come, more actions to come" on the financial firewall.

"They are not done. They know they've got more to do," Geithner said. He added that leaders had moved "slower than some people would like."

The Germans, whose powerful economy represents the economic keystone of Europe, seem loath to help fund yet more stabilization efforts.

In an editorial in the El Universal newspaper on the eve of the meeting, German Finance Minister Wolfgang Schauble wrote that "should we increase even more the firewalls? The response is a resounding no." Schauble also rejected sharing other Euro-zone country debts, or expanding the euro money supply to meet countries' budget gaps.

"This would not only not solve the problems of debt and competitiveness that brought the affected countries to their current state of affairs, it would also discourage their governments from carrying out consolidation and reform."

German central bank president Jens Weidmann noted Friday that Euro-area political leaders will meet in March to decide whether to further increase the current 500-billion-euro financial stabilization effort, and while he didn't rule out increased funding, he said money alone won't do it.

"Higher walls of money can buy time, but that time must be used to tackle the roots of the crisis," Weidmann told a seminar prior to the ministers meeting. "Ultimately, Greece cannot be forced to comply with the program," he said of the indebted country's commitment to make fiscal, wage and other reforms in exchange for the European bailout.

"But it should be clear that no further disbursements will be warranted if Greece fails to keep its side of the bargain," Weidmann said.

Mexican central bank Governor Agustin Carstens said Friday that the "IMF's lending capacity is an issue that will be discussed" at Saturday's meeting among finance ministers and central bankers.

But one Canadian finance official, who was not authorized to speak on the record, said that "on the issues of IMF funding, I don't think we are near a consensus."

5 ECONOMIC LANDMINES THAT COULD IMPACT CANADA IN 2012
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  • 1. RISING HOUSEHOLD DEBT

    Canada's household debt burden climbed to yet another record high in the third-quarter, prompting Bank of Canada Governor Mark Carney to call it <a href="http://www.montrealgazette.com/business/Mark+Carney+again+sounds+alarm+rising+Canadian+household+debt/5856418/story.html" target="_hplink">"the greatest risk to the domestic economy</a>." At 150.8, <a href="http://www.reuters.com/article/2011/12/14/us-economy-debt-idUSTRE7BC2DY20111214" target="_hplink">Canada's debt-to-income ratio is now higher than in the U.S. or the U.K</a>. Meanwhile, household net worth fell, which, as many observers have warned, has made Canadians more vulnerable to adverse economic shocks.

  • 2. SLUGGISH CONSUMER DEMAND

    Though BMO's Doug Porter maintains that low interest rates and modest job growth should prevent household debt issue from becoming "a clear and present danger to the outlook in the year ahead," he predicts that the debt burden is likely to increase. Unlike in the U.S., Canada's consumer recession was "very mild," leaving scant room for growth in consumer spending, he says. "At best, we see consumer spending growing in line with income next year," he said. "We've actually pegged it a little bit below income growth next year ... at less than two per cent in 2012." (FREDERIC J. BROWN/AFP/Getty Images)

  • 3. EUROZONE INSTABILITY

    When TD cut its 2012 outlook for the Canadian economy earlier this week to 1.7 per cent, the bank cited a deepening fiscal crisis in the eurozone as one of the primary factors. More bearish than BMO, which on Thursday held its expectation for Canada's GDP growth next year at two per cent, TD is forecasting "a deterioration of financial conditions and a significant European recession in the first half of next year." "<a href="http://www.td.com/document/PDF/economics/qef/qefdec11_can.pdf" target="_hplink">A deepening recession in the region will exert a significant drag on the global economy</a>," the bank maintained. "Canada will be negatively impacted through weaker commodity prices, confidence and export growth. Labour markets will also soften as a result." (ERIC FEFERBERG/AFP/Getty Images)

  • 4. CHINA LOSING STEAM

    The signs are abundant that the world's largest economy is cooling. Mounting local government debt and slowdowns in everything from industrial production to <a href="http://www.cbc.ca/news/business/story/2011/12/09/china-economy-slows.html" target="_hplink">the housing market has led many to predict softer economic growth in 2012</a>. "<a href="http://www.npr.org/2011/12/13/143623874/after-boom-chinas-property-market-heads-lower" target="_hplink">Real estate is a locomotive industry that leads at least 58 other industries</a>," Cai Weimin, who runs a real estate think tank in Shanghai, told NPR. "Doomsday probably won't come true in 2012, but for the Chinese economy, 2012 will be a very tough year. (Aaron tam/AFP/Getty Images)

  • 5. GROWING INCOME GAP

    As Canada's rich-poor divide widens, some experts warn that the concentration of wealth at the top of the income distribution and stagnating wages for everyone else could be a drag on the economy. Though Canada's income gap is not as pronounced as in the U.S., Canadian Centre for Policy Alternatives economist Armine Yalnizyan argues that the growing divide is bad for business all the same. <a href="http://www.huffingtonpost.ca/news/mind-the-gap" target="_hplink"><strong>Mind The Gap: Our examination of Canada's growing income divide</strong></a> "<a href="http://www.canadianbusiness.com/article/39123--inequality-is-bad-for-business" target="_hplink">Real growth in purchasing power has been restricted to a small fraction of Canadian consumers</a> in what is already a small market," she maintained in an op-ed in Canadian Business magazine. "Throttling aggregate demand slows the economy for everyone." Anne Golden, president and CEO of the Conference Board of Canada, echoes this sentiment. "Growing inequality distorts consumer patterns," she told The Huffington Post in a recent interview. "Most businesses, except maybe for Porsche [dealerships], rely on rising purchasing power of the many, not the few, to deliver growth and profits." (ADRIAN DENNIS/AFP/Getty Images)

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