Global recession grows closer as G20 summit fails
Cameron tells eurozone member states to solve their own problems. Link to this videoA world recession has drawn closer after a fractious G20 summit failed to agree fresh financial help for distressed countries and debt-ridden Italy was forced to agree to the International Monetary Fund monitoring its austerity programme.
UK hopes that the Germans would relent and allow the European Central Bank to become the lender of last resort for the euro were also dashed.
On a day of unremitting gloom and yet more market turbulence, the Greek prime minister, George Papandreou, won a late-night confidence vote in his parliament after making a speech in which he promised to start powersharing talks to form a caretaker coalition government. Although he won the vote by 153-145, he is now expected to step down and a national unity government is expected to take over in the coming days.
Papandreou said he would visit the country’s president on Saturday to launch power-sharing talks “with the [opposition] parties … for the formation of a government of broad co-operation.”
In a sign that the spread of the debt crisis to Italy could break up the single currency, the chancellor, George Osborne, admitted the Treasury was undertaking crisis planning for a eurozone collapse.
The G20 deadlock led David Cameron to issue one of his starkest warnings about the impact on the UK economy, saying: “Every day the eurozone crisis continues and every day it is not resolved is a day that it has a chilling effect on the rest of the world economy, including the British economy.
“I am not going to pretend all the problems in the eurozone have been fixed. They have not. The task for the eurozone is the same as going into this summit. The world can’t wait for the eurozone to go through endless questions and changes about this.
“We, like the rest of the world, need the eurozone to sort out its problems. We need more to happen in terms of detail on the European firewall.”
Cameron hinted at worse to come, describing this as only “a stage of the global crisis”.
There had been hopes that the G20 would agree to increase IMF resources by as much as $250bn to more than $1tn, but disagreements about the wisdom of it, structure, size and contributors to the fund left world leaders forced to pass the issue on to a meeting of G20 finance ministers next February.
The French president, Nicolas Sarkozy, had been eager to flourish a figure both to reassure the markets and to top his chairmanship of the G20.
Cameron revealed the friction, saying: “The very worst thing would be to try to cook up a number without being very specific about who is contributing what. If you cannot do that, it is better to say the world stands ready to increase resources to the IMF as necessary.”
In the financial markets an early rise in share prices was reversed after it became clear that divisions in the G20 would prevent a deal in Cannes to boost the firepower of the European financial stability facility (EFSF) or the IMF. The yield on 10-year Italian bonds rose from 6.2% to 6.4%, the highest since the euro was founded, raising fears that the country would face problems financing its huge debts.
Obama, under pressure from Congress, was deeply reluctant to contribute to an expansion of IMF funds without clearer signs that the eurozone was sorting out its problems. Admitting that he had been given a crash course in European politics, Obama urged Greek and Italian parliaments to take decisive action to control their deficits and combat what he described as some of the psychological origins of the crisis.
He also urged the euro area to start putting some resources into the EFSF, which Europe hopes to turn into a bailout fund with at least €1tn to deploy.
But the German chancellor, Angela Merkel, said: “There are hardly any countries here which said they were ready to go along with the EFSF.”
Berlusconi was summoned to a late-night hotel meeting with Merkel, Sarkozy, the IMF director general, Christine Lagarde, and Obama, where he was told that the IMF was to start monitoring to ensure tough austerity measures are implemented. The measures include changes to the labour market, pension reform and the sell-off of state-owned assets.
Italy has debts of €1.9tn, or 120% of GDP, and if it followed Greece down the path towards a financial bailout, or default, the impact on the European banking system would be vast. Italy faces new tests in further auctions of its debt this month – it has to raise €30.5bn in November and a further €22.5bn in December.
Sarkozy denied that the demands on Berlusconi represented an IMF coup, saying: “We never wanted to change governments, either in Greece or in Italy. That is not our role, that is not our idea of democracy, but it’s clear that there are rules in Europe and if you exonerate yourself from these rules you exclude yourself from Europe.”
Berlusconi, facing defections from his own party, insisted he had invited the IMF to offer advice. Berlusconi said on Friday he had rejected an offer of funds from the IMF – “I don’t think Italy needs that” – and said his country was more solid than France or the UK.
British officials privately admit that potential economic collapse in Italy is now the single biggest concern gripping world leaders. One said: “We cannot have the Italians meeting in crisis every three days. We need some action.”
The UK government will now focus on urging its European partners to make progress, and will continue to support extra cash for the IMF. Cameron said he would not need UK parliamentary approval for this as the Commons has already agreed to an increase that would cover the proposed UK additional contribution.
The EFSF has €440bn ($608bn) available to lend, of which roughly half is expected to be consumed by bailouts of Ireland, Portugal and Greece. Italy has nearly €2tn in debt outstanding.
The European Central Bank has purchased Italian debt since August, but will not carry on doing so indefinitely. The need to bolster the EFSF has led the EU to pursue countries outside the euro zone with surplus cash, such as China.