With Europe now back in recession, Greece still resisting austerity, and Italy so distrusted that it needs foreign scrutiny over its finances, is there a role for the rest of the world to save the Continent?
A valiant but beggarly start was made Thursday and Friday by the Group of 20 nations, whose leaders met in Cannes, France.
This gathering of the world’s largest economies – from China to Saudi Arabia – all seemed to grasp the gravity of Europe’s debt overhang and the need to work together. The non-European nations at least offered a listening ear. After all, Europe’s economy is too large to be allowed to sink and create a global whirlpool.
But what was missing was clarity about what each European country would exactly sacrifice for the greater good. The weaker nations of the 17-member euro tribe, starting with Greece, aren’t yet on a solid path to reducing their debt.
Instead of clarity, the key word was containment. So far, the euro nations, led by Germany, have rustled up $608 billion in a rescue fund for the smaller euro economies: Greece, Portugal, and Ireland. But with Italy now tottering, Europe needs outside help.
Italy’s debt is nearly 500 times the size of the current euro bailout fund. Even larger is the credibility gap of the Italian government, led by Prime Minister Silvio Berlusconi. His legal troubles and lost legitimacy make him a weak reed for enforcing fiscal reform.
While Europe can be patient with political turmoil in Greece – such as the flip-flopping over a referendum on austerity measures – the leaders at the summit decided that Italian politics – once seen as a harmless carnival – needs a grown-up.
So they are sending in the International Monetary Fund to monitor the implementation of Italy’s promised budget cuts and economic reforms, such as raising the retirement age. The IMF is quite accustomed to disciplining poor countries, whose corruption and excess social spending often leave them drowning in red ink. But now the IMF is acting as a fire wall to contain the euro crisis, not only as a resident nanny in Rome but as a potential conduit for rescue money from other nations, such as China and the United States.
If the IMF can help Italy restore trust and clarity about its reforms, then outside money may not be needed. Financial markets are impatient, however, at all this taffy-pulling diplomacy and politics.
As long as European leaders still work together, and have at least moral if not yet financial support from other countries, then maybe the crisis can evolve faster – from mere containment to heartening clarity.