The focus of the G20 summit in Mexico next week will inevitably be the fate of the eurozone, and that will be true whatever the Greek electorate does or does not decide. For the problem has gone far beyond Greece. There has been a sudden deterioration in economic activity across the region in the past few weeks and that is starting to affect the rest of the world. One instance has been the sharp fall in UK exports to Europe in the latest figures, another the fall in internal trade within the eurozone itself. Unsurprisingly the non-eurozone countries at the summit will be pressing its leaders to do something, anything, to stop the eurozone undermining the rest of the world economy.
In the short term, the central banks can and will step in to provide liquidity. The new lending programme of the Bank of England is one example of that. There is now a widespread expectation that the Federal Reserve will pump more funds into the US economy next week, while the European Central Bank will probably wait until the European summit at the end of the month to see what it can do to support whatever decisions are taken by the governments to support the eurozone in the longer term. And there lies the problem. Until eurozone leaders have a coherent plan that will enable the weaker countries to fund themselves at an acceptable rate, injections of liquidity from the central banks provide only the most temporary of relief.
At the present interest rates, approaching 7 per cent for 10-year funds, neither the Spanish nor the Italian government can afford to borrow. They are running out of money. Spain has acknowledged that it cannot guarantee paying pensions after July, thereby tacitly admitting that its problem is not just one of recapitalising its banks: it needs a sovereign bailout too. Italy's situation is slightly less pressing, but its overall debt is larger, at some 120 per cent of GDP. Among the major nations, only Japan has higher debt and it has been able to rely on domestic savers to buy its bonds. By contrast, both Spain and Italy have to borrow from abroad.
So what should we expect from the G20 meeting? Well, we have the full weight of the world's largest economic powers. They represent more than 80 per cent of global GDP. They have, when they act together, huge firepower. As past experience has shown, notably after the collapse of Lehman Brothers, they can stitch together a package that restores confidence and enables the world's business and financial communities to crank up trade and investment. In an emergency, they can be very effective.
But what the G20 cannot do is tackle structural problems within a particular region. So it cannot fix the problems of the eurozone. Only Europe can do that. And within Europe, only Germany is both a large enough economy and a sufficiently credit-worthy nation to be able to think of assembling the finance necessary to enable the eurozone's weaker members to pay their bills.