Leaders of the G20 last night pledged to take action to boost flagging world economic growth and backed moves by eurozone countries to move towards a banking union to restore stability to the financial system, but offered little new concrete support.
The communiqué issued after two days of talks in the Mexican resort of Los Cabos appeared to herald a shift in favour of the need to stimulate growth or continue with fiscal austerity and will now put the focus on the summit of EU leaders on 28 and 29 June.
In the one substantive announcement, the G20 unveiled commitments by their members to inject an extra $456 billion into the International Monetary Fund to act as a firewall against further financial contagion - $23 billion more than was announced two months ago.
In a key section of the communiqué the group said it expected eurozone members to take all necessary measures to "safeguard the integrity and stability" of the area and "break the feedback loop between sovereigns and banks."
Nations voiced support for the eurozone to take steps toward greater financial integration of the 17-member single-currency bloc, such as banking supervision, bank resolution and recapitalization, and deposit insurance.
“Euro area members will foster intra-euro area adjustment through structural reforms to strengthen competitiveness in deficit countries and to promote demand and growth in surplus countries.”
However Christine Lagarde, managing director of the IMF, indicated that more work needed to be done by the eurozone, saying only that the “seeds of a pan-European recovery plan were planted” at Los Cabos.
“Their intention to consider concrete steps towards a more integrated financial architecture is important, and I look forward to discussing this further when I visit Europe this week.”
In a specific reference to Greece, the communiqué said: “We look forward to the euro area working in partnership with the next Greek government to ensure they remain on the path to reform and sustainability within the euro area.”
The communiqué is unlikely to end the pressure on Greece to exit the euro and speculation of contagion to Spain and Italy. Peter Boone, a senior fellow at the Peterson Institute of International Economics said on Tuesday that Greece was “very close” to quitting the eurozone.
“I think this single currency is just proving to be a failure, very hard on populations and eventually, as we’re seeing, democracies will overthrow it,” he said.
Alan Brown, senior adviser and former CIO at Schroders Investment Management, said: “I think we’re likely to be close to the point – Greece is likely to be out within a year.”
Yields on 10-year Spanish bonds stayed above 7% - the level that forced Ireland and Greece into a bailout – for the second day running despite the E100bn bank rescue fund announced last week.
“The problem is when you have an exchange rate that can’t adjust, capital flows out of these regions and there’s no adjustment process,” said Boone. “And that’s what Spain is proving too.”
Andrew Kenningham, global economist at Capital Economics said Spain would have to seek a sovereign bailout “sooner rather than later”. “The best that can be said about the Los Cabos summit is that it appears to have been less fractious and better organised than November’s meeting in Cannes,” he said.
David Cameron, prime minister of the UK that is outside the euro, said the zone has taken major steps towards fiscal and economic integration “including through a banking union”.
“These are significant agreements and now the eurozone countries need to get on and implement them,” he told reporters as the meetings ended. “What I have sensed at this summit is that there is a fresh impetus with the eurozone members in terms of using all the mechanisms, institutions and firepower that they have to stand up and support their currency.”
Angela Merkel, the German Chancellor, left Los Cabos without giving a briefing, but earlier insisted the zone’s leaders would resolve the euro crisis at their own pace.
“It is obvious that we have problems in the euro zone, and that it is necessary to act,” she said. “But the important thing is that we [the Europeans] have made clear that we are determined to act."
The communiqué appeared to indicate a strong shift away from the policy of austerity lauded by members such as the UK and Germany and towards a greater focus on stimulating growth as backed by France and Brazil.
“Strong, sustainable and balanced growth remains the top priority of the G20, as it leads to higher job creation and increases the welfare of people across the world,” the leaders said. “We are committed to adopting all necessary policy measures to strengthen demand, support global growth and restore confidence.”
Merkel insisted that deficit reduction was still a priority. “Discussion here has been balanced: we need the right mix of consolidation and growth stimulus at the same time," she told reporters.
But in a decision that G20 leaders will hail as a significant achievement, they decided to raise the resources of the IM by $456 billion an increase from the $430 billion agreed at a meeting of their finance ministers in April.
The BRICS countries, that had kept their pledges under wraps, announced major contributions. China promised $43 billion, Brazil, Russia and India $10 billion each, and South Africa up to $4 billion. Summit hosts Mexico also pledged $10 billion.
In return for these pledges, the BRICS are demanding more voting rights on the IMF’s governing board.