At one of the most disarrayed G20 summits ever, Italy agreed Friday to submit to rare scrutiny by the International Monetary Fund to boost confidence that it will carry through necessary fiscal reforms, the latest step in Europe’s struggle to avoid economic chaos.
The summit, however, failed to win promises of additional money from outside countries to shore up the Eurozone’s debt bailout fund, and new jitters about Italy’s ability to withstand its rising borrowing costs began to overshadow a tentative agreement — widely hailed just a week ago – to rescue Greece from defaulting on its sovereign obligations.
In the end, vague offers to increase the firepower of the International Monetary Fund – at some later date – were all the Eurozone leaders were able to take home after two days of tumultuous talks.
With their own finances already stretched from bailing out Greece, Ireland and Portugal – and the United States and other allies wrestling with their own problems – the Eurozone had been looking to the IMF to help line up more financing to prevent the debt crisis from spreading to larger economies like Italy and Spain.
crucial to the eurozone
Italy’s fate in particular is crucial to the Eurozone because its economy – the third largest in the currency union – would be too expensive to bail out. The implications for the world economy are stark: The debt crisis that has rocked the 17-nation Eurozone threatens to push the world economy into a second recession.
European leaders could point to one potential catastrophe averted: They stared down Greece’s prime minister and berated him into scrapping a referendum that threatened their European bailout plan. Greece’s politics are in upheaval as a result, but the shaky bailout plan appears back on track – for now.
“We want Europe to work,” French President Nicolas Sarkozy said on French TV when the summit was over. “I think today we can have confidence … but that’s not to say our troubles are behind us.”
In the end, the Greek question completely derailed Sarkozy’s aim of using the summit to show that Europe had sorted out its debt problem once and for all – and possibly convince some of them to pitch in to the rescue effort.
In the space of days, the already shrunken list of goals set out by France to close out its year as head of the G20 was scrapped, replaced by a nearly constant stream of shocking new developments and reversals in Europe’s long-running attempt to get control of Greece’s debt crisis.
IMF scrutiny
The need to reassure bond markets led Italy to agree to submit to IMF scrutiny.
The IMF said it will monitor Italy’s financial reform efforts, a humbling step for one of the world’s biggest – but also most indebted – economies.
To solve the political deadlock that threatens to bring down his government and slow down implementation of reforms, Berlusconi said he had asked the IMF to check up on the country’s progress in implementing the measures with periodic, public reports.
The most likely way the Eurozone could still get additional financing is through a special account under the auspices of the IMF, into which individual countries could make payments.
Those investments in turn could then be used to boost the Eurozone’s own bailout fund, the €440 billion (US$606 billion) European Financial Stability Facility. That way, countries such as the United States, which think Europe should pay for its own financial problems, wouldn’t have to put any money in. And countries like Russia and Brazil, which have expressed interest in investing in the Eurozone, could.
But Merkel and IMF chief Christine Lagarde both said not a single country at the two-day meeting made a firm commitment to participate.
That reality was perhaps best illustrated at the height of the summit last Thursday evening when hundreds of journalists dropped what they were doing in the basement of Cannes’ Palais des Festivals and gathered around television screens to watch a live transmission from the Greek parliament in Athens, where Prime Minister George Papandreou was speaking.
The week of unending drama in Athens horrified its European partners, spooked global markets and overshadowed the summit in Cannes. The threat of a Greek default or exit from the common euro currency has worsened the continent’s debt crisis.
When the week started, Europe had finally reached an intricate, ambitious and fragile deal to try to rescue Greece and stop the crisis from spreading any further.
