G20 Continues With Failed Policies in Europe, Putting Regional and Global Economy at Risk, CEPR Co-Director Says

The Group of 20 (G20) leading economies are continuing failed policies in the eurozone, jeopardizing economic recovery in the region, and heightening the risk of financial contagion outside of Europe, Mark Weisbrot, Co-Director of the Center for Economic and Policy Research said today.

"It's unfortunate that the G20 continue to proceed with failed policies in Europe, putting the region at the risk of recession and also risking increased financial contagion to the rest of the world," Weisbrot said. "Let's hope that MF Global isn't the tip of any icebergs."

While much of the current analysis of Europe's crisis has focused on the political difficulties of coordinating fiscal policy among 17 governments, and reaching agreements on debt restructuring and guarantees, there are more basic problems with eurozone economic policy, Weisbrot argued.

"The European authorities continue to make things worse because they are trying to shrink their way out of the problem, which is not possible. The current crisis is a direct result of the fear in financial markets that the European authorities will do to Italy what they have done to Greece."

Weisbrot noted that when Greece was negotiating its first agreement with the International Monetary Fund (IMF) in May of 2010, Greece's debt was 115 percent of GDP, and could have been managed with low interest loans and a stimulus that restored growth. Now, he said, even the proposed 50 percent haircut on Greece's debt -- which is currently 166 percent of GDP -- won't be enough to avoid default.

"The have made a mess, and it's getting worse," said Weisbrot. "They need to do three things to get out of this: 1) restructure the Greek debt to a sustainable level, 2) provide a credible guarantee to Italian and Spanish bonds and 3) reverse their macroeconomic policy and provide a stimulus to growth and employment, especially in the weaker eurozone economies.

"So far, they haven't come close to accomplishing any of these basic pre-requisites for a resolution of the crisis."

Weisbrot just returned from Riga, where he spoke about the Latvian and eurozone economies at a forum sponsored by the Friedrich Ebert Stiftung. He also recently debated these points with Luc Everaert, Assistant Director of the European Department of the IMF during the IMF's Annual Meetings in Washington.