The G-20 in Los Cabos, Mexico, ended mainly as a platform for urging European leaders to take decisive action on a financial crisis that is daily spiraling downward, though Greece today announced it had finalized a government coalition.
But no headlines came out of Mexico to temper the market forces now chewing away at Spain and Italy, having already abandoned Greece – and no decisions to spark more of that intangible elixir: confidence.
If there is a European G-20 takeaway, it may be the pressure exerted by global leaders, including US President Barack Obama, on Angela Merkel, chancellor of Europe’s German powerhouse, ahead of a crucial June 28 EU summit, whose purpose increasingly appears to provide a long-term solution.
That summit, like so many before, is billed as crucial. This time it may be: It is a likely showdown over long-term questions, like “mutualization” of debt, banking unions, and federalism that were long avoided during the years of abundance prior to the financial crisis.
In a way, the underlying issue June 28 is whether Europe will nudge closer to a “United States of Europe” federal model.
"The G-20 didn't go well for anybody, especially for the Europeans," says economist Nicolas Bouzou, head of Asteres Consultancy in Paris, which advises French firms. "Emerging countries, leading investors, and debt buyers in Europe are irritated by the European decision process, which they consider too slow, without any structural reforms. They seem incapable of speaking with a single voice, even between Germany and France.”
While Merkel and new French President François Hollande agreed substantially on the idea of a financial transaction tax as a tool to finance European growth, it did not appear in the G-20 draft. Significant gaps exist between the two leaders over how to approach Europe's woes.
Debates in Los Cabos largely turned on austerity versus growth, and the German model of balanced budgets versus the Keynsian model of stimulus, to answer Europe’s rising unemployment and banking debt.
But Europe has debated this for more than a year, with little change. At the G-20, Ms. Merkel held firm on the need for the new Greek government to adhere to austerity-based bailout agreements.
Meanwhile, across the Atlantic, the issues continue to compound: Spain, Europe’s No. 4 economy is twisting in the wind with unsustainable bond rates; it is scheduled to sell two- and three-year notes tomorrow, and if rates don’t change, Spain may only have a few more weeks of solvency, financial analysts say.
Italy, the No. 3 economy, is also on the ropes. Italy's caretaker prime minister, Mario Monti, suggested at the G-20 that the two eurozone rescue funds begin buying debt from stricken European states.
Meanwhile, Greece continues to simmer. A center-right Greek coalition was finally agreed upon today and the new prime minister, Antonis Samaras of the New Democracy party, was sworn in. But its main initial task will not be to hew to the EU bailout terms, which is what European leaders understood, but to “renegotiate" the agreement, according to coalition partner Socialist leader Evangelos Venizelos, speaking today. That sets up a de facto showdown in Europe among those less and more willing to give Greece flexibility.
Mr. Venizelos vows a "major fight" at the June 28 meeting for the release of bailout funds on better terms. By the end of July, Greece will not be able to pay public salaries.
As Europe faces the possibility of a broader meltdown, some analysts say it now desperately needs both long-term and short-term answers.
The $125 billion bailout of Spain’s banks by the EU stability fund provided only a day or two of relief from markets; last week, Spain’s 10-year bonds clicked above an unsustainable 7 percent.
“Even if the debate on austerity vs. growth could be settled, we have moved past the point where a growth package would make a difference,” says Sony Kapoor of Re-Define, a Brussels economic think tank. “We must have a longer-term solution, a fiscal union. We have no long-term plan, and that is where we are headed. The period of stability packages has passed and the G-20 offered really nothing.”
A one-size-fits-all statement issued from the G-20 read: "We are united in our resolve to promote growth and jobs…. Strong sustainable and balanced growth remains the top priority of the G-20, as it leads to higher job creation and increases the welfare of people across the world."