by C. Randall Henning, Peterson Institute for International Economics
Interview by Christopher Alessi, Associate Staff Writer, Council on Foreign Relations
May 17, 2012
© CFR.org. Reproduced with permission.
The leaders of the Group of Eight world economies—Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States—are set to meet at the Camp David US presidential retreat in Maryland May 18–19. While African food security is slated to be at the top of their agenda, the Peterson Institute's C. Randall Henning says the euro area crisis is likely to dominate the group's discussions. "The non-Europeans at the G-8 should impress upon [Europe] the necessity of developing a growth agenda and moving toward a European-wide solution to the banking problems in a preemptive way," Henning says. The G-8 can also lay the groundwork for next month's G-20 summit in Mexico, Henning explains, by developing a consensus for "how the rest of the world will participate in the rescue packages for the euro area."
What are the summit's key objectives?
Each party will come with different objectives, but for the United States the key objectives should include preparing for the NATO summit, which happens a couple of days later [also hosted by the United States, in Chicago on May 20–21; all G-8 countries except Russia will participate], and subsequently the G-20 summit in Mexico in the middle of June. This is an opportunity for the eight to compare notes and help to mold the consensus in those larger forums.
The second important thing is that it's an opportunity for President Obama to help guide the formation of the response to the euro crisis, because the Europeans obviously are behind the curve. He will want to nudge them to address this crisis in a more deliberate and preemptive way.
The G-8 still has an important role to play in developing a consensus among the eight that can then be brought to the G-20.
How are the interests of these eight countries aligned, and how are they in competition?
At the summit you'll have the Italian prime minister [Mario Monti], the German chancellor [Angela Merkel], and the French president [Francois Hollande], all from within the euro area. These people are now engaged in negotiations with their other euro area counterparts on how to address the crisis and how to implement the stability treaty they signed last winter [the so-called fiscal compact]. The rest of the world has an interest in their doing this in a way that advances growth in Europe and limits contagion to the rest of the world. So [the G-8 countries] have a shared agenda in this sense, but it requires pushing the Europeans to overcome some of the stumbling blocks [including differences over austerity policies versus growth policies] in intra-European negotiations.
In what way can the non-euro area countries help those in the single currency resolve their differences and further address the sovereign debt crisis?
The non-Europeans at the G-8 should say, "We told you so. We said a long time ago that an incremental approach to the crisis was dangerously behind the curve." Now we have a situation where Europe—and Germany in particular—is taking a hard line on Greece, but that has negative consequences in the markets more broadly. Had the Europeans used the past year-and-a-half to create larger firewalls, put in place a deposit- insurance scheme and a bank rescue mechanism on a European-wide basis, then Spain, Italy, and Portugal would have been more insulated from the collapse in Greece that we are now seeing. They haven't done enough of that. And as a consequence, we are seeing the potential for a spillover from Greece that could affect the rest of the euro area.
The non-Europeans at the G-8 should impress upon them the necessity of developing a growth agenda and moving toward a European-wide solution to the banking problems in a preemptive way, so when they have a confrontation with Greece they can do so without contagion in the rest of Europe—and, indeed, the rest of the world.
More broadly, what is the G-8's relevance considering the growing importance of developing countries and the larger G-20 forum? What role can the G-8 play in the world today?
The G-8 used to be the center of the action, but when the global financial crisis struck, they realized they needed the active participation and support of other advanced and industrialized countries and also of the large emerging markets to address the crisis and develop a coordinated strategy.
In the wake of [the crisis], it seemed as if the G-8 had become less important or overshadowed. But the G-8 still has an important role to play in developing a consensus among the eight that can then be brought to the G-20. Twenty countries is a little too large a number to do consensus-building on the spot. There needs to be some preparation for those meetings in country caucuses prior to the G-20; this is one mechanism that can help to do that.
Resolution of the euro crisis is the key thing. If they are able to effectively advance Europe toward proactive measures in terms of the growth agenda and the banking agenda, then [the summit] will be a success.
[Another] point is that the G-7 finance ministers [particularly those of the non-euro area countries: Japan, the United Kingdom, the United States, and Canada] have been very important in weighing in on the euro crisis—both in terms of sending messages to the Europeans about the import of addressing the crisis in a preemptive way, and secondly in terms of how international institutions—the International Monetary Fund in particular—could be used to address contingencies within the euro area. So much of the influence of the G-7 on the euro crisis has been behind the scenes and in telephone conversations among the ministers, but nonetheless, it has played a critically important role in the background, and this G-8 process is part of that.
What kind of consensus should we be watching for ahead of the G-20 summit? What are the main ideas these eight countries are going to coalesce around in advance of that larger summit?
A critical issue on the agenda for Mexico is how the rest of the world will participate in the rescue packages for the euro area. We have been expecting that there would be an agreement on borrowing arrangements at the International Monetary Fund, whereupon the IMF can draw on resources not only from Europe but also from other advanced industrialized countries and the emerging markets in order to provide a loan for a larger European country [like Spain or Italy], should that prove to be necessary. We did not conclude the agreement at the spring meetings [of the IMF] and we are expecting to conclude that in Los Cabos in Mexico [at the G-20 summit]. The G-8 could help tee that up at the meetings later this week.
Resolution of the euro crisis is the key thing. If they [the G-8] are able to effectively advance Europe toward proactive measures in terms of the growth agenda and the banking agenda, then [the summit] will be a success. If they are not able to do this, then I don't think we can judge the summit a success, regardless of what other issues they deal with.
Policy Brief 13-23: How to Form a More Perfect European Banking Union October 2013
Policy Brief 13-17: A Realistic Bridge Towards European Banking Union June 2013
Op-ed: Five Myths about the Euro Crisis September 7, 2012
Article: Why the Euro Will Survive: Completing the Continent's Half-Built House August 22, 2012
Testimony: Challenges of Europe's Fourfold Union August 1, 2012
Working Paper 12-12: Sovereign Debt Sustainability in Italy and Spain: A Probabilistic Approach August 2012
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Policy Brief 12-18: The Coming Resolution of the European Crisis: An Update June 2012
Book: Resolving the European Debt Crisis March 2012
Policy Brief 12-4: The European Crisis Deepens January 2012
Policy Brief 11-21: What Can and Cannot Be Done about Rating Agencies November 2011
Working Paper 11-2: Too Big to Fail: The Transatlantic Debate January 2011
Policy Brief 10-27: How Europe Can Muddle Through Its Crisis December 2010
Policy Brief 10-14: In Defense of Europe's Grand Bargain June 2010
Op-ed: New Imbalances Will Threaten Global Recovery June 10, 2010
Book: The Euro at Ten: The Next Global Currency? July 2009
Op-ed: Europe Must Look East to Deal with the Euro October 11, 2007
Op-ed: Start by Saving the Eurozone October 24, 2008
Speech: The Euro and the World Economy April 27, 2005
Book: The Euro at Five: Ready for a Global Role? April 2005