G7 led by US can't drive the world economy anymore. G20 must step up.
As developed economies deal with debt and emerging economies like China ramp up, the G20 must spearhead coordinated, complementary policies to navigate the choppy waters ahead, especially for Europe. Austerity alone won't do the trick.
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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.Skip to next paragraph
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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.
As everyone by now knows, Europe’s leaders must further commit to far greater integration though a fiscal union and deeper economic coordination, and move toward political union, or face the collapse of the euro.
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If the G20 wants to remain credible in this second round of global turmoil, it needs to fulfill all the commitments it took on at previous meetings.
It must refresh its declaration from the London summit to strengthen the so-called surveillance capacity of the International Monetary Fund to independently assess policies of countries that contribute to instability of the global system, enhance its quotas, and reform governance so it reflects the new weight of the emerging economies. There is all the more reason to effect this shift in the near term since the emerging economies are being called upon to participate in the financial stabilization of Europe.
To become an effective institution of global governance and build a community of interests over the long run, the G20 should consider establishing an Executive Committee with a permanent secretariat so there is continuity of policies and decisions across the succession of summits. As with the UN Security Council, the Executive Committee should have permanent members representing all regions, with rotating temporary members.