Saturday, March 03, 2012

G-20 Officials Meet in Mexico and Postpone Decision to Increase Aid to Europe

CBC News: G20 Fails to Reach Europe Debt Deal
Council of the Americas: Feb. 25-26: G20 Finance Ministers Meet in Mexico’s Capital, Discuss EU Crisis
FT: China and Japan Unite on IMF Resources
NYT: G-20 Meeting Focuses on Euro Firewall Fund
Reuters: Mexico Hopeful of G20 Promise on IMF Resources
WSJ: G-20 Defers Move on Aid for Europe

On February 25 and 26, the Group of Twenty (G-20) finance ministers and central bankers, representing twenty major world economies, met in Mexico. They mainly discussed whether to increase the lending capacity of Europe’s rescue funds by combining the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). Uniting the EFSF and ESM would create a $1 trillion firewall to help support struggling European economies like Spain and Italy. The EFSF is a temporary bailout fund Eurozone countries created to address the sovereign debt crisis, and the ESM will replace the EFSF when it takes effect in July 2012 as a permanent bailout fund to provide relief for EU countries in financial crises. G-20 officials also debated whether to increase the IMF’s lending capacity by $500 billion to approximately $1 trillion to provide additional protection for countries facing the effects of global financial instability.

Commentators have remarked on the irony of Mexico serving as Chair of the G-20 for 2012. Three decades after the Latin American debt crisis during which Mexico defaulted on its debt obligations, Mexico’s economy is characterized by “low debt, well-managed fiscal accounts and an inflation rate that is under control.” As Mexican President Felipe Calderón opened the summit, he emphasized Mexico’s unique position to contribute to the European crisis’ resolution considering its own recovery from crisis to emerge as a stable and growing economy. Mexico proposed that the G-20 agree to a simultaneous increase of the European bailout funds and IMF resources. Mexico argued that an increase of both funds is necessary to achieve a large enough firewall to help countries in crisis and stop the debt crisis from continuing to spread.

Contrary to Mexico’s wishes, however, G-20 officials postponed their discussion of an expanded European bailout fund to the next G-20 meeting of finance ministers and central bankers in April because of a lack of consensus on the issue. Germany does not agree that the European bailout fund should be increased, and since it would serve as the major financial contributor, an increase in the bailout fund will not occur without its agreement. Germany’s resistance stems from a belief that increasing the size of the bailout fund would mean that countries like Spain and Italy will not follow through on implementing structural changes. If additional money becomes available to help these countries during the crisis, they will be less likely to institute reforms and impose austerity measures that burden their citizens.

G-20 officials also postponed a discussion of whether to increase IMF resources. To many of these officials, expansion of IMF resources should be contingent on whether Europe’s bailout fund is increased. The United States and Canada have refused to increase their contribution to the IMF without Germany first agreeing to increase Europe’s bailout fund. They hope that if Europe’s bailout fund is substantially increased, an increase of IMF resources will prove unnecessary. China and Japan have also expressed their unwillingness to contribute additional money to the IMF unless European countries first expand their bailout fund. They argue that if the European bailout fund is not increased, an increase in IMF resources cannot cover the gap in funding necessary to stop the Eurozone crisis from spreading to other economies around the world.

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