European leaders scrambled to buy themselves time in the battle to save the eurozone on Tuesday, promising their G20 partners they would integrate their banking sector and restart growth.
Backed by key EU members including Germany, France and Britain, the pledges came at the end of two days of talks between the G20 powers in the Mexican beach resort of Los Cabos.
“In Los Cabos the seeds of a pan-European recovery plan were planted,” IMF managing director Christine Lagarde said, looking forward to next week’s European summit, when a more definite action plan is expected to emerge.
US President Barack Obama spoke for many of his colleagues when he expressed relief at Europe’s “heightened” urgency, adding: “I am confident that over the next several weeks, Europe will paint a picture of where we need to go.”
In their joint statement, the G20 leaders vowed to “take the necessary actions to strengthen global growth and restore confidence.” And the heads of Europe’s major economies agreed “to consider concrete steps towards a more integrated financial architecture, encompassing banking supervision, resolution and recapitalization, and deposit insurance.”
However, far from the moat-ringed conference center on a rocky hill above San Jose del Cabo, bond markets jacked up rates on Spanish and Italian debt amid self-fulfilling fears that the crisis that sank Greece is spreading again.
The leaders said eurozone members will “take all necessary measures” to stabilize the single currency bloc, including moves to “break the feedback loop” that has weak governments piling on more and more debt to bail out their banks.
In addition, should economic conditions worsen once more, the countries with more leeway in their budgets “stand ready to coordinate and implement discretionary fiscal actions to support domestic demand,” the communique said.
The US, the IMF and the European Central Bank have all urged greater banking integration in Europe, hoping to instill more confidence as banks falter in some of the worst-hit nations.
Obama, worried Europe was not moving resolutely enough to contend with an economic crisis that could torpedo his hopes of re-election in November, huddled in a special side-meeting with German Chancellor Angela Merkel, French President Francois Hollande, Spanish Prime Minister Mariano Rajoy, Italian Prime Minister Mario Monti and British Prime Minister David Cameron, as well as EU chiefs Jose Manuel Barroso and Herman van Rompuy.
Shortly after the Obama-EU meeting, the wording of the final G20 communique was confirmed, but there were few clues given about the path forward even if the statement did betray a greater sense of urgency.
The new element was the move towards a banking union. Europe-wide guarantees on deposits and a central authority to close banks that go bust are seen as a way to promote the flow of cash through the system and give more confidence to lend.
Supporters believe a union would break a cycle in which banks are obliged to rely on their own troubled countries’ governments and central banks, creating a vicious cycle of mounting debt that brings down all of the institutions.
Germany, the largest economy in Europe, has resisted debt burden-sharing out of concern that its own comparatively healthy system will be obliged to help out weaker banks in countries that have lacked discipline.