The onus on solving the European debt crisis has shifted almost entirely to Germany after the Group of 20 rejected contributing to a bailout until Europe’s wealthier countries put more money on the table.
“Europe has substantial resources and has sufficient resources to fund the necessary firewall,” Finance Minister Jim Flaherty said at a press conference at the end of a weekend meeting in Mexico City. “We expect the euro zone countries to step up to the plate.”
European countries tried to rally their allies in the G20 to contribute to the International Monetary Fund’s request for $500-billion (U.S.) in new resources, much of which would be used to guard against a worst-case scenario of bankruptcies in countries such as Italy and Spain.
The United States led a broad resistance to the request. In a statement, G20 finance ministers and central-bank governors said it was “essential” that European countries erect a substantial financial backstop before the group takes up the IMF’s request for new funding. The group said it would revisit the issue in April when it meets in Washington.
Failure to resolve an issue that has divided the G20 for months ensures that worries about the solvency of debt-ridden European countries will continue to haunt financial markets, constraining global economic growth. It also casts doubt on the ability of the world’s leading countries to steer the global economy effectively.
“We need a more systemic approach” to dealing with sovereign-debt issues, said Thomas Bernes, executive director of the Waterloo, Ont.-based Centre for International Governance Innovation and a former executive director for Canada at the IMF. The European debt crisis shows that “lessons of the past have not been learned,” he said.
Germany is central because it is Europe’s biggest economy. It also is blocking an effort by a majority of countries that use the euro to construct a financial backstop of as much as €750-billion ($1-trillion Canadian). Germany, which would have to contribute the bulk of the funds, says that amount is too large.
That resistance might be political. The German legislature this week will vote on the latest bailout fund for Greece, which is unpopular with many German legislators. A promise by Chancellor Angela Merkel would risk increasing tensions.