G7 led by US can't drive the world economy anymore. G20 must step up.

Once again the world economy is on the brink. Only three years ago America was the epicenter of crisis. Today it is Europe. An enormous insecurity about the future has gripped ordinary citizens and investors around the world. Frustration and anger are spilling into the streets.

Once again the G20 must act to prevent a devastating slide into a deep contraction, if not depression, and avoid a damaging retreat into protectionism and competitive devaluation.

At the Cannes Summit, the G20 countries should recognize once and for all that, in today’s tightly linked global economy, no single country or bloc of countries is immune to spreading fragility and volatility. The advanced and emerging economies alike are highly vulnerable to economic and financial turmoil beyond their borders.

The only answer to this challenge is for each to work with the others, make the requisite adjustments, and reach a common balance to the benefit of all. Political leaders must acknowledge this convergence of interests as the heart of the G20 process so they can begin to build a sustainable community of interests at Cannes and beyond.

Under French President Nicolas Sarkozy’s leadership, the G20 countries should develop a credible global growth and employment strategy that aims at an inclusive expansion that narrows the growing income gap within countries and between nations, fairly sharing the burden across boundaries.

Today, Europe is the urgent priority. The Brussels agreement on Greece’s sovereign debt and the more realistic “haircut” for bondholders, an increase in the firepower of the European Financial Stability Facility (known as the "rescue fund") to a potential 1 trillion euros, and bank recapitalization are necessary and significant steps.

But as markets have already realized, Europe’s fiscal, banking, and political crisis can only be resolved in a way that does not hamper growth prospects in the short term while putting into place credible long-term policies to reduce deficits. If everyone pursues austerity today, there is no way out for those with unhealthy balance sheets. Where deficits and interest rates are too high, governments have no choice but to cut budgets. Where balance sheets are healthy, for example in Germany, there is more room to support growth.

Greece and the rest of the European periphery can have no credible strategy to return to growth without supportive eurozone action of some kind. They cannot do it alone without the exchange rate or inflation as tools. As other central banks have realized, easing credit restraint is a necessary condition for growth. That is no less true for Europe.

Without such complementary and coordinated policies, Europe’s sovereign debt, just like America’s mortgage debt, will continue to weigh us all down and impede any return to global growth.

Even as Europe seeks outside help from lenders, including from the more resilient emerging economies such as China, the European Central Bank must stand as the lender of last resort.

1 | 2

Next