by Jacob Funk Kirkegaard, Peterson Institute for International Economics
Interview by Christopher Alessi, Associate Staff Writer, Council on Foreign Relations
June 20, 2012
© CFR.org. Reproduced with permission.
The euro area sovereign debt crisis dominated the G-20 leaders' summit in Los Cabos, Mexico, June 18–19, as the United States and other G-20 members struggled to secure Europe's commitment to a concrete timeline for further political and fiscal integration. "The United States and the G-20 as a whole have very limited leverage over the intra-euro area political process of integration," says the Peterson Institute's Jacob Funk Kirkegaard. Still, Kirkegaard applauded the euro area's public and "detailed commitment" to banking sector integration and reform, saying "quite far-reaching announcements on this issue" should follow the June 28–29 European Council summit.
What were the main takeaways of the summit?
The two key takeaways are: first, the additional commitment of funds to the International Monetary Fund (IMF) by the large emerging markets, which indicates that they have accepted to continue a longer-term process of IMF quota reform, despite the Obama administration's inability to get Congressional approval for the 2010 agreement before the October 2012 deadline. Secondly, it is the detailed commitment of the euro area, which "will"—rather than intend, or should—"take all necessary measures to safeguard the integrity and stability of the area, improve the functioning of financial markets, and break the feedback loop between sovereigns and banks."
What concrete steps, if any, did the United States and other G-20 countries convince Europe to take to more forcefully tackle the euro area sovereign debt crisis?
Little. The reality is that the United States and the G-20 as a whole have very limited leverage over the intra-euro area political process of integration. The detailed commitment to banking sector integration, however, is a positive.
What's next for Greece now that it has formed a new government and agreed to abide by its EU-IMF bailout agreements?
The Greek government will get the political commitment to ease austerity at the coming European Council meeting next week, and the imminent troika [Greece's international creditors—the European Commission, European Central Bank (ECB), and International Monetary Fund] visit will hammer out a revised bailout program, tweaked mostly at the margins though.
What are EU leaders doing to address the worsening situation in Spain, highlighted by rising government bond yields?
The urgency of banking sector integration is clearly driven by events in Spain, and we should expect far-reaching announcements on this issue at the upcoming European Council [meeting]. Provided that there is the political commitment to integrate euro area banking sector regulation (e.g., a handover of sovereignty), it is probable that bond market interventions in Spain and Italy will resume by the ECB and/or the European Stability Mechanism or the European Financial Stability Facility [the euro area's rescue funds].
What's the relevance of an informal organization like the G-20 in alleviating the euro area situation and other global economic crises?
[The G-20] is quite useful in an acute crisis to coordinate global policy interventions. Yet, absent an acute crisis—like in early 2009—the G-20 cannot independently make a difference for global policymaking. Its principal benefit in 'normal political times' is therefore in the informal meetings among heads of state at the sidelines—this time symbolized by the announcement of Mexico and Canada joining the Trans-Pacific Partnership [trade] negotiations.
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Op-ed: Five Myths about the Euro Crisis September 7, 2012
Article: Why the Euro Will Survive: Completing the Continent's Half-Built House August 22, 2012
Testimony: Challenges of Europe's Fourfold Union August 1, 2012
Policy Brief 12-18: The Coming Resolution of the European Crisis: An Update June 2012
Book: Resolving the European Debt Crisis March 2012
Working Paper 12-12: Sovereign Debt Sustainability in Italy and Spain: A Probabilistic Approach August 2012
Policy Brief 12-20: Why a Breakup of the Euro Area Must Be Avoided: Lessons from Previous Breakups August 2012
Policy Brief 12-5: Interest Rate Shock and Sustainability of Italy's Sovereign Debt February 2012
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Working Paper 11-2: Too Big to Fail: The Transatlantic Debate January 2011
Policy Brief 10-27: How Europe Can Muddle Through Its Crisis December 2010
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Op-ed: Greek Deal Lets Banks Profit from "Immoral Hazard" May 6, 2010
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