February 27, 2021

Europe Is Urged to Take Bolder Action on Debt

The stock sell-off, which began in Europe and continued in the United States, was prompted by news that an important German member of the European Central Bank was resigning, creating new uncertainty for the euro monetary union’s ability to take unified action.

But adding to the gloom was a word of caution from one G-7 attendee, the United States Treasury secretary, Timothy F. Geithner, that headwinds from Europe’s deepening debt crisis risked hitting the United States at a time when its own economy was still weak.

He urged European leaders to take more forceful action to show they were committed to resolving their problems. But he did not say the United States was prepared to backstop them to prevent the crisis from spreading.

There were also admonishments from the chief of the International Monetary Fund, Christine Lagarde, who said it was time for Europe’s policy makers to take bold and unified action to see the global economy through what she described as a “dangerous phase.”

By the end of the day, the Europeans had acknowledged the seriousness of the situation and were eager to reassure markets.

The G-7 finance officials issued a statement declaring its members were “committed to a strong and coordinated international response” to the crisis and the slowdown in global growth. But the group stopped short of taking explicit action to address tensions that have worsened in financial markets over the last month. Coordinated action might be left to the Group of 20 industrial and emerging economies, which includes China and has started to eclipse the G-7 in influence.

In the meantime, a senior American official said, until European parliaments vote later this month on whether to expand a bailout fund for the crisis, the European Central Bank has enough firepower to keep Spain and Italy from catching the contagion.

Some economists are not so sure of that.

“I do think the United States needs to try to prepare for what might happen if the European crisis is not resolved soon,” said Martin N. Baily, a senior fellow at the Brookings Institution and a former chief of the Council of Economic Advisors during the Clinton Administration.

In the financial crisis of 2008, he noted, the United States Federal Reserve lent a lot of money to the Europeans who needed it at that time. “I think they should work with the E.C.B. and the main governments of Europe now to make sure that we do not fall again into a liquidity crisis, a solvency crisis with the banks,” Mr. Baily said.

One nation that is not part of the G-7 but has the world’s second-biggest economy and its largest stash of foreign reserves — China — has been seen as a potential rescuer, if it were to help shore up the weaker European economies by buying up more of their government bonds.

But don’t count on it.

China already has apparently poured tens of billions of dollars worth of foreign reserves into euro-denominated investments this year. But Chinese officials are still cautious about taking big risks with the country’s $3.2 trillion nest egg. When considered in the context of China’s 1.3 billion people, that nest egg is not necessarily an infinite treasure.

“China is a poor country with only $4,000 per capita income,” Yu Yongding, a Chinese top economist and former member of the central bank’s monetary policy committee said in an interview in China. “To talk and think about China to rescue countries with $40,000 per capita incomes is ridiculous.”

China is ready to help, Mr. Yu said, “but European countries first should show that they have a clear road map and convincing policies to preserve the euro and solve their problems as well as the political will to make necessary sacrifices.”

And so, with mounting worries of a new recession in the United States and Europe, the G-7 finance ministers have little choice but to focus on restoring growth — even at the risk of running up further deficits and debt.

Keith Bradsher contributed reporting from Hong Kong and Landon Thomas contributed reporting from London.

Article source: http://www.nytimes.com/2011/09/10/business/global/g-7-faces-calls-for-urgent-action-to-spur-growth.html?partner=rss&emc=rss

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