These days, world leaders have been engaging in an endless series of summits. They have talked a lot about the heightened downside risk from the sovereign debt crisis, financial market volatility and the global economic slowdown. However, it is not good for leaders, especially those in the eurozone, to engage in talk without decisive action to prevent the debt problem in Europe spinning out of control.
Criticism of such fruitless high-level talks among European leaders has frustrated markets around the world, but there are even greater concerns about the spillover effects of a worsening eurozone debt crisis on the rest of the world.
Over the past six months, we have continued to hear similar calls for more concerted action among nations to contain the European debt woes from the summit of G8 leaders in Deauville, France, in late May, the EU summit in Brussels, Belgium, last month and the meeting of G20 leaders in Cannes, France, early this month, yet we have also seen leaders say Europe must come up with its own solutions, with few of these summits yielding any concrete plans.
There was some progress, though. During the G20 summit in Cannes, the 17-nation eurozone finally appeared to agree to beef up its 440 billion euro (US$604.69 billion) bailout fund, the European Financial Stability Facility (EFSF), and was calling for bondholders in the private sector to take 50 percent losses on Greek debt.
However, European leaders still had to call an emergency meeting again after the G20 summit because of the shocking news of a planned Greek debt referendum. Even though Greece finally called off the controversial referendum last week under global pressure and a new Cabinet under new Greek Prime Minister Lucas Papademos, a former vice president of the European Central Bank (ECB), was sworn in on Friday, no one can say for sure when the EU aid package will be finalized, because it also depends on how the new Greek government can commit to the austerity measures and targets set by eurozone leaders last month.
It could be a turning point for eurozone leaders to rethink strategies for solving their debt problem and start doing something differently, when Italy last week replaced Greece as the focal point of trouble in the eurozone. This is because Italy has played the role of the linchpin in the eurozone economy — it is the third-largest economy in the eurozone, accounting for 17 percent of European GDP and 25 percent of outstanding government bonds — and, most importantly, it is too big to fail. However, will action be taken soon or is that just more wishful thinking?
Yet, while Italian Prime Minister Silvio Berlusconi looks set to resign and a new government is likely to emerge soon to manage the country’s debt problem, it is not clear that Italy can receive any substantial outside aid, especially from the ECB.
There are reasons that the ECB should be more proactive in dealing with the eurozone debt problem, and it is really the only practical option in the short term, but several ECB policymakers last week rejected the idea of unlimited purchases of government bonds issued by Italy and other financially indebted economies, pouring cold water on the likelihood of short-term relief to the jittery financial markets.
A lack of decisive action by the ECB and European governments would make things worse and result in a larger risk of recession in the region, endangering global economic prospects. However, a bigger challenge for governments is the socio-economic impact of implementing fiscal reforms and unpopular austerity measures, including high unemployment and weaker economic growth during the transition period. This will be a crucial test to their commitment to reform, and the whole world is watching.
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