Leaders from the world's largest advanced economies, the so-called Group of Eight (G8), meet Friday and Saturday with one big item pushing its way to the forefront: How to get Europe's debt crisis back under control.
That's far from the only item on the agenda of the G8 summit, which is being hosted by President Obama at the presidential retreat in Camp David, Md. The leaders are also concerned about issues including the conflict in Syria and the threat of nuclear-weapons proliferation. They plan to talk about global efforts to guard against famine and malnutrition.
But the big and unavoidable issue is clear. Europe's sovereign debt crisis has flared anew since recent elections in Greece and France, sending negative financial ripples worldwide. Getting the eurozone back on track is Job No. 1.
Europe's austerity push, designed to address big budget deficits and a rising tide of public debts, has left the region in or near recession. Greece, with the biggest debt load, has seen a flight of bank deposits and a failure by newly elected lawmakers to form a unity government. As that nation prepares for new elections, the word "Grexit" has entered headlines as shorthand for the idea that Greece may soon exit the eurozone.
A sign of the global turmoil: A broad index of European stocks is down 15 percent in the past two months. Stocks have fallen a similar amount in emerging-market nations. America's Standard & Poor's 500 index is down about 8 percent. And a "flight to safety" by investors has buoyed the US dollar, US Treasury bonds, and German government bonds.
"The eurozone is at a crossroads. It either has to make up or it is looking at a potential breakup," British Prime Minister David Cameron, one of the G8 leaders, said in a speech Thursday. He said that without policies that lead toward both debt reduction and growth, the region is in uncharted territory, "which carries huge risks for everybody."
What can the G8 do? No grand plan is expected at the summit. But the weekend gathering is an important venue for the officials to prod, cajole, and seek a meeting of the minds. In attendance are three key euro zone leaders (from Germany, France, and Italy), plus leaders of the US, Britain, Canada, and Japan. President Vladimir Putin of Russia, the eighth G8 nation, is not attending.
Leaders within Europe are trying to set a new balance between the financial imperative of budget discipline and the political imperative to seek economic growth. The push for austerity is championed by Germany's Angela Merkel, while France's newly elected François Hollande symbolizes the push for growth.
More urgently, the leaders need to confer on a game plan for the possible exit by Greece. That would lead to turmoil in financial markets and to heightened questions about the sustainability of other high-debt nations – Spain and Italy – as members of the eurozone.
Prime Minister Cameron, along with his blunt warning of a breakup, outlined three elements of a possible solution to the crisis:
First, he said, high-debt nations can't avoid confronting unsustainable borrowing and spending. But amid concerns about recession and political unrest, he added, the rest of Europe will need to chip in by doing more to stimulate growth. The European Central Bank, for example, may need to spur consumer demand through easier monetary policies.
Second, he called for new governance mechanisms to strengthen the eurozone. Those could include, for example, "Eurobonds" that are backed collectively by member governments.
Third, Cameron said, "we all need to address Europe’s overall low productivity and lack of economic dynamism, which remains its Achilles' Heel. Most EU member states are becoming less competitive compared to the rest of the world, not more."
Although Cameron is a political conservative, those general themes are echoed by many economists and policy analysts looking at the debt crisis.
Even if Greece leaves the eurozone, for example, that wouldn't end its fiscal challenges or create a quick influx of jobs. And in France, while President Hollande is a socialist, he is not expected to depart sharply from the path of fiscal discipline that euro member nations have been emphasizing over the past year.
The timing of the latest anxiety about Europe's economy is challenging, given that China's huge economy is also showing signs of cooling. (The troubles there could be a topic for discussion in a month, when the G20, a larger group of global leaders that includes China, meets.)
The timing also represents a political hurdle for Obama. He's hoping that a modest economic rebound in the US will continue or even gain momentum between now and the November election. But as recent stock charts confirm, troubles across the Atlantic have negative effects on things like US exports and investor confidence.
Many investors are already adapting to expectations of a Greek exit, but the larger question is whether the rest of the currency union would then lock arms and hold together. David Kotok of Cumberland Advisers, an investment firm, writes that "Italy is the one to watch."
It is the world’s third largest debtor, with a shrinking economy and public debt at about 120 percent of one year's gross domestic product – much higher than is considered healthy.
At the same time, many economists expect the eurozone to remain largely intact, albeit with a bumpy path ahead.
Jacob Kirkegaard, of the Peterson Institute for International Economics, outlines a bit of a silver lining for Europe, if it continues to pursue fiscal restructuring: Now may be better than waiting. That's because if reforms are inevitable, it's easier to pursue them when other nations like the US and China are growing and have stimulative monetary policies.