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G20 summit: US ‘encouraged’ by eurozone plans

US President Barack Obama has said he is encouraged by European leaders’ plans to tackle the eurozone crisis, as the G20 summit in Mexico ends.

In a final communique, world leaders said they would take “all necessary measures” to protect the euro area.

Leaders said they welcomed Spain’s plans to recapitalise its banks, according to the communique.

The talks were being held as Greece seeks to form a coalition government and Spain’s borrowing costs soared.

Speaking to reporters at the end of the summit, President Obama said that European leaders recognised that “bold and decisive” action was needed to address Europe’s debt crisis.

“Euro Area members of the G20 will take all necessary measures to safeguard the integrity and stability of the area”

“What I have heard from European leaders during these discussions, they understand the stakes, they understand why it’s important for them to take bold and decisive action, and I am confident they can meet those tests,” he said.

President Obama said that while there was no “silver bullet” to solve Europe’s crisis, “each step points to the fact that Europe is moving towards further integration rather than break-up”.

“I am confident that over the next several weeks, Europe will paint a picture of where we need to go,” he added.

‘Concrete steps’

As the summit came to a close the European leaders pledged to maintain stability in the eurozone and to work with the next Greek government towards reform and sustainability.

“Euro area members of the G20 will take all necessary measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks,” the joint statement said.

“We support the intention to consider concrete steps towards a more integrated financial architecture,” it continued.

“The European Union members of the G20 are determined to move forward expeditiously on measures to support growth”.

But German Chancellor Angela Merkel stressed that Greece must hold up its end of the deal.

“It’s obvious that the reforms that were agreed in the past are the right steps and that they therefore must be implemented,” Mrs Merkel told reporters.

She added that world leaders had “very balanced” talks on growth.

“We need the right mix of budget consolidation… and at the same time efforts for growth.”

In the closing discussions of the summit, leaders also agreed not to introduce new protectionist measures until 2014.

But Russian President Vladimir Putin said that the imposition of trade barriers could be a vital tool in protecting Russian jobs.

Meanwhile, the “Brics” economies (Brazil, Russia, India, China and South Africa) also pledged to increase their contributions to the International Monetary Fund (IMF) – which has been seeking to boost its finances to prevent any future financial crisis.

The five Brics nations all offered to contribute $10bn (£6.4bn) to the IMF each in exchange for voting reforms that would give them greater influence in the organisation.

China also pledged $43bn (£27bn) to the IMF’s crisis intervention fund, which has almost doubled to $456bn (£366bn).

The BBC’s diplomatic correspondent Bridget Kendall, at the Los Cabos summit, says the offer of billions of dollars from the developing economies is perhaps the most tangible result of the two-day-long talks.

The funds, which would be released by the IMF if the eurozone crisis spreads, are a sign of support but also indicate how fragile many fear the economic situation in Europe to be, our correspondent adds.

G20: How their economies are faring

Country Growth (% GDP change, 2010-11) Unemployment (% 2011) External debt (% GDP, end of 2011)
Source: Principal Global Indicators
Argentina flagArgentina 8.9 7.5 7.6
Australia flagAustralia 2.2 5.1 86.6
Brazil flagBrazil 2.7 6 17.2
Canada flagCanada 2.4 7.5 70.2
China flagChina – mainland n/a 4.1 n/a
EU flagEuropean Union* 1.5 10.1** 120.0
French flagFrance 1.7 9.3 191.2
Germany flagGermany 3 6.5 159.4
India flagIndia 6.9 n/a 17.2***
Indonesia flagIndonesia 6.5 6.6 26.5
Italy flagItaly 0.4 8.4 115.1
Japan flagJapan -0.7 4.6 52
Mexico flagMexico 3.9 5.2 26.1
Russia flagRussia 4.3 6.6 27.7
Saudi Arabia flagSaudi Arabia 6.8 n/a n/a
South Africa flagSouth Africa 3.3 24.9 29.4
South Korea flagSouth Korea 3.6 3.4 34.9
Turkey flagTurkey 8.5 9.8 42.7
UK flagUK 0.9 8.1 421.9
US flagUS 1.7
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Debate Grows as Europe Fears Return of a Crisis

Angela Merkel, the Chancellor of Germany

Angela Merkel, the Chancellor of Germany (Photo credit: Wikipedia)

BERLIN — The European financial crisis has shown signs of reigniting in recent days, sharpening the debate between the champions of austerity and a growing chorus urging more expansionary policies to promote growth.

Even the traditionally hard-line International Monetary Fund called on Tuesday for stronger European nations to ease the fiscal brakes by stretching out budget cuts over a longer period. But if that message was intended foremost for Germany, it seemed destined to fall on deaf ears: with two state elections coming up next month, Chancellor Angela Merkel is unlikely to shift her position, popular with voters, against additional help for the economies of struggling European partners.

“We don’t see the need that perhaps other countries see to boost growth through additional increases in expenditures,” said a senior official in the German Finance Ministry, speaking on the condition of anonymity.

“Instead, we see quite clearly, and will remind our partners about their responsibilities from Toronto,” the official said, referring to commitments made at the Group of 20 summit meeting in June 2010, “to cut their deficits in half and stabilize their debt levels.” At the same time, the official said that Germany hoped other countries would join in increasing the International Monetary Fund’s resources to help it combat the crisis.

Politics as much as economics is adding to the sense of uncertainty in Europe. President Nicolas Sarkozy of France, who is trailing the Socialist candidate François Hollande in the polls before the first round of the presidential election on Sunday, has joined his opponent in promoting pro-growth policies. In Greece, nationalist anti-German fringe parties are gaining strength ahead of next month’s parliamentary election.

The German state elections may not directly affect the federal government in Berlin, but they distract from Continent-wide concerns and crisis management while thrusting parochial issues to the forefront. The German government does not have a mandate to share further the burden of the common currency on less competitive economies like those of Greece, Portugal, Ireland and, increasingly, Spain and Italy.

What seems certain, however, is that the crisis will continue to fester until new measures are taken to address its root causes. Borrowing costs for struggling southern European countries like Spain and Italy have begun to rise again as the effect of the European Central Bank’s injection of about $1.3 trillion in cheap loans into the banking system in December and March has faded much faster than expected. The three-year loans were meant to buy time for struggling governments and financial institutions, but the breathing room appears likely to be measured in months rather than in years.

The recent shift has underscored that there have been no substantive fixes beyond promises by countries to reduce their budget deficits. “It looks like it’s coming back with a vengeance, largely because none of the underlying problems have been solved,” said Philip Whyte, a senior research fellow at the Center for European Reform.

Mr. Whyte said that despite two years of crisis management, the fundamental structure of the euro zone remained intact, with lower-productivity economies in the south yoked to higher-productivity economies in the north, which prevents the laggards from competing through a currency devaluation.

“The E.C.B. bought time, but what it ended up doing was simply tightening the link between national banks and their sovereigns,” Mr. Whyte said. “They made the system more vulnerable if markets started losing faith in debt sustainability in countries like Spain.”

Yields on Spain’s 10-year bonds climbed above 6 percent on Monday, though they fell slightly on Tuesday after a successful auction of short-term debt by Spain’s treasury. Spain has emerged as the central test this year after missing its deficit targets as it slips back into recession. The government in Madrid has had a difficult time reining in spending by the 17 regional governments.

A bailout of Spain would be much costlier than one for smaller economies like those of Greece, Portugal or Ireland, testing the resources of the euro zone countries. Many economists, particularly in the United States, have argued that Spain has to stimulate its economy with additional spending if it hopes to return to economic growth, an argument rejected by the German government.

In an interview with the German newspaper Frankfurter Allgemeine Zeitung on Tuesday, Christine Lagarde, the managing director of the International Monetary Fund, said she was concerned about the health of Spanish banks and warned against slashing spending too quickly. It is not a view shared here in the German capital.

In an interview with Reuters on Tuesday, Germany’s finance minister, Wolfgang Schäuble, praised Spain for making difficult economic changes. “You don’t win back trust overnight,” Mr. Schäuble said, adding that Spain was following the right path by cutting spending. German officials have also recommended changes in labor markets as a longer-term strategy to promote growth.

As deficits balloon in countries across Europe, Germany continues to watch its deficits and financing costs fall. In another sign of Germany’s recent strength, the Bundesbank said on Tuesday that the country’s debt had fallen to 81.2 percent of gross domestic product in 2011, compared with 83 percent in 2010. That is still far above precrisis levels: in 2007, German debt was 65.2 percent of the size of the country’s economy.

“The problem with the crisis in Germany is that we know we have a crisis, but we don’t feel it,” said Eckart D. Stratenschulte, a political scientist and the director of the nonprofit European Academy Berlin.

Even as the European Central Bank loans improved market conditions, European leaders, including Ms. Merkel, were clear that they did not believe that the crisis was over. Many in Germany argue that a sense of crisis — and the elevated borrowing costs that come with it — is necessary to end out-of-control spending in the heavily indebted nations and to push through the economic liberalization they need to restore growth.

But the higher borrowing costs and austerity measures cut into growth, critics say, lowering government revenues in a self-defeating downward spiral and leading to higher interest rates and further budget cuts. “It’s concerning that the markets are again running out of patience and driving yields higher,” said Thomas Mayer, chief economist at Deutsche Bank in Frankfurt. “That creates further head winds.”

The I.M.F. on Tuesday raised its forecast for global growth slightly for the year. In Europe, the fund projected recovery in the second half of 2012, except for Spain, Italy, Greece and Portugal, where substantial improvement is not expected until next year.

The crisis, Mr. Mayer said, is like “a manic depressive moving between euphoria and worries, and now we’re in the valley of worries again.”

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Greek socialists vote for new leader

Greek socialists vote for new leaderGreek supporters and members of the socialist Pasok party were set to ratify the election of Finance Minister Evangelos Venizelos (pictured) as new party leader on Sunday, ahead of a general election expected late April or early May.
Greece’s socialists were set on Sunday to choose Finance Minister Evangelos Venizelos as their new leader in a bid to avert a disaster in upcoming elections after two years in power marked by austerity pain.

A French-educated law professor from the northern metropolis of Thessaloniki, Venizelos stands unopposed to take over the historic Pasok party which has ruled Greece for a combined two decades since democracy was restored in 1974 after a seven-year army dictatorship.

The 55-year-old told reporters last week that the election provided a good opportunity to energise the party ahead of legislative elections which are expected to take place in upcoming months.

“It will be a useful opportunity to rally the party, to mobilise and activate its reflexes,” he said.

Venizelos is hoping to capitalise on a record deal with private investors last week to erase more than 100 billion euros ($130 billion) of near and midterm debt to give Greece time to enact additional reforms needed for future loans.

But the International Monetary Fund reminded Athens on Friday that the pressure remains very much in place.

Greece has “little if any margin” for slippage on reforms under its new bailout program, according to IMF documentation for its loan to Athens.

The International Monetary Fund, which decided a new 28 billion euro loan for Greece on Thursday said Greece could reach its debt reduction targets if it adheres to the tough austerity measures — including slashing minimum wages, trimming pensions and cutting 15,000 public jobs this year.

But if implementation moves too slowly or falls short, or if the economy does not respond to reforms as fast as expected, “a deeper recession and a much higher debt trajectory would be the likely result.”

“Political risks linked to the electoral calendar create additional uncertainty about policy implementation,” the IMF added.

Venizelos insists that his goal is to win the next legislative election, which has not been officially announced but is expected in late April or early May.

“The goal can only be victory,” the bullish minister said last week. “We have a crisis in progress ahead of us, one that we must manage.”

Around 390,000 card-carrying party members and millions of supporters have been called to participate in Sunday’s nationwide procedure which will give an early indication of Venizelos’ chances of turning around the party.

After two years in power before a coalition government was formed with the conservative New Democracy in November 2011, Pasok has been identified with an unpopular EU-IMF economic rescue plan and faces the lowest ratings in its 37-year history.

Appointed to the finance ministry in June, one of Venizelos’ first acts was to push through an austerity law worth 28 billion euros ($37 billion), including 50 billion euros in privatisation measures, in the teeth of violent street protests.

The party’s outgoing leader George Papandreou, son of Pasok founder Andreas Papandreou, was forced to step down as prime minister a few months later to avert a backbencher revolt in parliament.

A poll in Kathimerini daily on Friday, which incorporated a large absentee expectation of 25.5 percent, put Pasok back in fifth place with 11 percent, far behind the conservatives who were given a 14-point lead.

The poll gives the new Pasok leader an approval rate of only 30 percent.

Greece’s current coalition government, headed by former European Central Bank deputy chief Lucas Papademos, must still ratify in parliament a new eurozone bailout worth 130 billion euros designed to save Athens from default.

And the next government must pursue the unpopular economic overhaul on top of past tax hikes and wage and salary cuts that have plunged Greece into the worst recession in decades, with more than a million people officially out of work.

A gifted orator, Venizelos had previously campaigned to take over the party in 2007 after a previous Pasok electoral defeat but handily lost to Papandreou.

A decade ago, he was the minister in charge of Greece’s hectic preparations for the 2004 Olympic Games that eventually ran massively over budget.

Ballots opened at 0700 GMT at around 1,000 locations nationwide.

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Greek finance minister takes charge of socialist party

 

With general elections due to take place as early as 29 April, Venizelos’s selection as leader of what has traditionally been the country’s biggest leftist force is seen as key to political stability.

Newly elected president of Pasok socialist party Evangelos Venizelos

The newly elected president of the Pasok socialist party, Evangelos Venizelos, arrives at the party’s headquarters in Athens.

Barely a week after negotiating the largest sovereign debt restructuring in history, the Greek finance minister, Evangelos Venizelos, has been elevated to the helm of Pasok, the country’s embattled socialist party.

As thousands of Pasok members filed into polling stations to endorse the bullish politician – who was the sole candidate – Venizelos pronounced the start of a “new era” for a party whose popularity has plummeted as it has navigated Greece’s financial crisis.

“This is the beginning of Pasok’s quest to find its soul again,” said the 55-year-old law professor, who replaces the former prime minister George Papandreou.

With general elections due to take place as early as 29 April, Venizelos’s selection as leader of what has traditionally been the country’s biggest leftist force is seen as key to political stability. In an economic climate that has become increasingly explosive, polls have shown other leftist groups and extremists gaining ground.

The finance minister, who is expected to resign from the post on Monday, is among Athens’s most talented politicians, and his handling of the €206bn (£171bn) bond swap – the success of which surprised even the cynics – has won widespread plaudits.

“It’s astonishing that a French-trained law professor who was not a typical expert in economics did so well negotiating what is one of the biggest financial experiments in modern global history,” said Theodore Pelagidis, professor of economic analysis at the University of Piraeus.

“Because he is so mentally sharp he was able in record time to familiarise himself with exotic financial tools and procedures.”

The deal, a precondition of further aid from Brussels, the European Central Bank and the International Monetary Fund (IMF), was closed after eight months of highly complex negotiations between Greece and private sector bondholders at the Washington-based Institute of International Finance.

Athens receives a first tranche of aid on Monday, exactly one day before it must repay €14.5bn in maturing debt.

The groundbreaking agreement, which slices €107bn from Greece’s debt pile, appears to have eased fears of an imminent Greek exit from the eurozone, a scenario likened at the weekend to “opening the gates of hell” by the country’s central bank governor, Giorgos Provopoulos.

“Fortunately the decisions by the Eurogroup and successful completion of PSI [bond swap] are making this scenario distant and give Greece the chance to enter, with hard work, a virtuous circle,” he said.

Rebuilding Pasok

Pasok has an estimated 400,000 card-carrying members. Aides say if Venizelos’s candidacy is endorsed by 100,000 it will have been a success, given the collapse in support for a party identified almost exclusively with the biting austerity demanded in exchange for aid.

Elected to power with a landslide victory in October 2009, the socialists’ ratings have crashed to around 10%, levels not seen since the party, founded out of an anti-junta resistance movement by George Papandreou’s father, Andreas, was first voted to parliament in 1974.

“Venizelos has earned the respect of everyone, even his fiercest enemies, with the stamina he showed handling the PSI,” said a government official referring to the debt restructuring. “But the one-million-dollar question now is will he be able to rebuild Pasok?”

Capitalising on the agreement is unlikely to be enough. Under extraordinary pressure to deliver on their promise to modernise the economy by enacting unpopular reforms, Greek politicians must walk the tightrope of pleasing creditors while placating an increasingly angry populace.

Speaking to Sunday’s To Vima, Poul Thomsen, the IMF mission chief to Greece, said that while the debt swap provided a necessary breathing space to enforce change, “continued international support depended on stable progress.”

It was, he said, the country’s last chance. A third rescue package – already being discussed in view of the austerity-driven economic death spiral gripping Greece – was “off-limits”.

“If that happens there will be a problem,” he told a local radio station, adding that public utilities that had “outlived” their purpose had to be closed immediately.

No one is more aware of the demands now being made of Greece than Venizelos. Insiders say the finance minister had “three frank discussions” with his German counterpart, Wolfgang Schauble, in which he was told, bluntly, that Athens either enact growth-enhancing structural reforms or “be left out of the eurozone”.

As the man most associated with painful fiscal policies, his first act as finance minister last July was to push through a €28bn package of austerity cuts that included a deeply unpopular privatisation drive – measures that prompted an orgy of violent street protests.

With recession set to further erode Greece’s economic output – GDP has fallen by a cumulative 20% since 2008 – and an army of international “supervisors” about to descend on Athens permanently, resentment over policies that are also seen to impinge on the nation’s sovereignty have far from abated.

Instead, Venizelos, who becomes Pasok’s fourth president, takes over a party that is not just floundering but fighting for its life.

 

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World economies ‘need more reform’

Speaking at a conference in Beijing to an audience of Chinese and foreign officials and business executives, Christine Lagarde said developed countries needed to strengthen their financial systems and cope with high debt.

She said developing countries had to improve their defences against external shocks.

“The world economy has stepped back from the brink and we have causes to be a little bit more optimistic,” she said. “But optimism should not give us a sense of comfort and certainly should not lull us into a false sense of security.”

Ms. Lagarde said the global economic recovery would be “a marathon, not a sprint”.

She said European leaders needed to stay vigilant about debt, focus on “steady, rigorous implementation” of financial measures, and careful

ly watch the economic situation in Greece.

On Thursday the IMF approved 28 billion euros (£23.3 billion) in funding for crisis-hit Greece over the next four years, as dizzily high borrowing rates have blocked its ability to raise money on the international bond markets.

Greece is having to enact harsh austerity measures in return for the rescue loans.

The bailout comes as European governments try to slash deficits that ballooned in the aftermath of the financial turmoil of 2008 and this year signed off on a new set of rules that would punish countries that overspend.

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