Perilous
Times
Global recession grows closer as G20 summit fails
IMF to monitor Italy to ensure austerity as leaders fail to agree
plan for financial aid for distressed countries
* Patrick Wintour and Larry Elliott in Cannes
* The Guardian, Saturday 5 November 2011
Cameron tells eurozone member states to solve their own problems.
Link to this video
A 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.
Financial markets fell sharply after the two days of talks in
Cannes broke up in disarray, amid concerns that Italy will now
replace Greece at the centre of Europe's deepening debt crisis.
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.