The leaders of eight of the world’s biggest economies meet this weekend outside Washington, seeking to keep Europe’s debt crisis from spiralling out of control and jeopardising fledgling recoveries in the US and elsewhere.
The turmoil in Greece is draining confidence in the 17 countries that use the euro. Borrowing costs are up for the most indebted governments. Depositors and investors are fleeing banks seen as weak. Unemployment is soaring as recession grips nearly half the eurozone countries. And global markets are on edge.
All that forms a tumultuous backdrop as representatives of the G8 countries – the United States, Germany, France, Britain, Japan, Russia, Italy and Canada – head to Camp David. Standing in the way of a breakthrough are disagreements over how to bolster Europe’s economy and avoid a broader catastrophe.
In advance of the talks, German Chancellor Angela Merkel struck a conciliatory note this week. She said in a television interview this week that she was open to measures to help stimulate Greece’s economy as long as the country honours its commitments to shrink its debts. US Treasury Secretary Timothy Geithner applauded the softer tone emerging among European leaders.
The shift shows that European leaders recognise that countries can’t increase their economic growth if they’re forced to focus solely on cutting spending and reducing debts.
At this weekend’s talks, non-European leaders will seek assurances that European leaders could contain the damage from a banking meltdown in Greece. They worry about a panic that could spill into Portugal, Spain and other indebted European countries – and to nations outside the continent whose banks are connected to Greek banks.
The meetings began yesterday evening with an economics-focused summit at Camp David, the presidential retreat in Maryland’s Catoctin mountains. They will end tonight. Most of the officials will join a larger group of international leaders in Chicago for a national-security oriented Nato summit tomorrow and Monday. Investors have been shaken by the power vacuum in debt-stricken Greece. They fear the consequences if Greece refuses to impose deep spending cuts agreed to under a bailout deal. They worry that the bailout could collapse, toppling Greece’s economic and banking system and forcing the nation from the eurozone.
Should that happen, larger governments in Spain or Italy that are struggling to ease their debt loads might soon fail. The eurozone itself could splinter. The result could be a global crisis to rival the one that followed the 2008 collapse of the investment bank Lehman Brothers.
Behind the turmoil is a growing realisation that cost-cutting alone won’t solve Europe’s crisis. Europe’s governments have begun to seek ways to energise the continent’s economy. Yet when money is tight and borrowing costs are high, governments have little ability to quickly stimulate growth.
The Obama administration is also concerned that shocks from Europe could slow the US economy and threaten President Barack Obama’s re-election prospects.
Yet it’s also aware there’s no simple solution. European countries are straining under high borrowing costs. Their lending rates are high because investors are nervous about their debt loads relative to the strength of the economies.
Under pressure from Germany, Europe’s strongest economy, governments have laid off workers, cut pay for others, reduced spending on social programmes and imposed higher taxes and fees to boost revenue.
Yet as economies have shrunk, countries’ debt as a percentage of their economies has worsened. Leaders are increasingly recognising that budget-cutting must be paired with steps to invigorate Europe’s economies.
Among the growth measures some economists recommend are reducing regulations for small businesses, making it easier for workers to find jobs across the eurozone and relaxing barriers that countries have created to protect their industries.