Weisbrot: G20 Continues With Failed Policies in Europe
Risk of Increased Financial Contagion to Rest of the World
The Group of 20 (G20) leading economies are continuing failed policies in the eurozone, jeopardizing economic recovery in the region, and heightening the risk of financial contagion outside of Europe, according to Mark Weisbrot, Co-Director of the Washington, DC-based Center for Economic and Policy Research (CEPR).
“It’s unfortunate that the G20 continue to proceed with failed policies in Europe, putting the region at the risk of recession and also risking increased financial contagion to the rest of the world,” Weisbrot says. “Let’s hope that MF Global isn’t the tip of any icebergs.”
While much of the current analysis of Europe's crisis has focused on the political difficulties of coordinating fiscal policy among seventeen governments, and reaching agreements on debt restructuring and guarantees, there are more basic problems with eurozone economic policy, Weisbrot argues.
"The European authorities continue to make things worse because they are trying to shrink their way out of the problem, which is not possible. The current crisis is a direct result of the fear in financial markets that the European authorities will do to Italy what they have done to Greece."
Weisbrot notes that when Greece was negotiating its first agreement with the International Monetary Fund (IMF) in May 2010, Greece's debt was 115% of GDP, and could have been managed with low interest loans and a stimulus that restored growth. Now, he says, even the proposed 50% haircut on Greece's debt -- which is currently 166% of GDP, almost three times the official EU permitted maximum -- won't be enough to avoid default.
"They have made a mess, and it's getting worse," says Weisbrot. "They need to do three things to get out of this: 1) restructure the Greek debt to a sustainable level, 2) provide a credible guarantee to Italian and Spanish bonds and 3) reverse their macroeconomic policy and provide a stimulus to growth and employment, especially in the weaker eurozone economies.
"So far, they haven't come close to accomplishing any of these basic pre-requisites for a resolution of the crisis."
Weisbrot has just returned to the US from Riga, Latvia’s capital, where he spoke about the Latvian and eurozone economies at a forum sponsored by the Friedrich Ebert Stiftung<http://www.fesdc.org/>, a German social democratic think-tank.