Decisive euro action is needed at the G20 summit

By Gordon Brown
June 15, 2012

The European crisis is no longer a European crisis. It is now everyone’s. Unless Monday’s G20 summit in Mexico coordinates a concerted global action plan right now, we face a global slowdown that will also have a deep impact on the U.S. presidential election and even on China’s transition to a new leadership. This is the last chance.

The standard, but often empty, language of summit communiqués will simply not do when the euro area is finally approaching its own day of reckoning. Whichever way the Greeks vote in Sunday’s election, a chaotic exit from the euro is becoming more likely: Its tax revenues are collapsing, not rising as promised. Unable to regain access to markets, Portugal and Ireland will soon have to ask for their second IMF programs. Sadly Italy – and potentially even France – may soon follow Spain in needing finance as the European recession deepens. Even German banks, which are some of the most highly leveraged, are not immune from needing more capital.

At G8 and G20 summits, world leaders have tended to be mere spectators as Europe has gone from one failed intervention to another. Now they must move decisively as they did in 2009. They must not leave Mexico without agreeing to support a big European firewall to stop contagion. And they must construct a global growth initiative for East and West.

For four years now Europe’s one-dimensional obsession with public debt meant it took its eyes off the seismic tremors in banking and quite failed to grasp the underlying structural problem: how to achieve growth within the current euro. In the four years since American and British banks recapitalized, added capital (around 4 percent more) and wrote off bad debts (an equivalent 4 percent write-off), Europe has vacillated. Its euro-area bank recap added only half a percent of new bank equity – and an even smaller write-off of toxic debts. Now, we must look for a bank recapitalization of anything between 200 billion and 500 billion euros.

Yet Europe’s financial sector has an even bigger problem: their banks still have 24 trillion euros of outstanding loans, as against America’s $14 trillion (11 trillion euros), and because of their size, they depend on wholesale financing, which is starting to dry up. Gene Frieda of Moore Capital has shown how Spain’s private-sector external debts – debts owed to the rest of the world – are now so large that they cannot be repaid on any normal timetable. They dwarf any bank capital shortage. Recapitalizing the Spanish banks with 100 billion euros cannot wish away what are, in effect, 2 trillion euros of external private-sector liabilities that are difficult to refinance. For months now the Spanish have relied on the European Central Bank to step in, but soon their collateral on offer will not be good enough. So as yields rise, the debt dynamics become unstable, and at some point soon, as Frieda suggests, Spain will face a funding crisis that will require either large concessionary financing or debt write-downs. And when that happens, there is only one institution inside the euro that can offer the unlimited support needed: the European Central Bank. Of course the final showdown can be postponed with private-sector haircuts, bank recaps and ECB conditional liquidity, but they’ll not be able to forever disguise the inescapable logic of a single currency area: that, to secure private-sector funding, free of continuing crises, you need an effective lender of last resort and a fiscal union to pay for it.

Already we are in the downward spiral that shows no sign of ending. Austerity means decreasing economic activity and then an ebbing of confidence. As, in turn, wholesale funding becomes more difficult to obtain, confidence ebbs further, and, just as the economy sinks deeper into recession, bank losses get larger and government deficit targets cannot be met. What’s more, with Greek private debt already subordinated to that of official funders, private funders will not be easily attracted back as long as they fear defaults and even exits from the single currency. They have to be satisfied with stronger guarantees that their money will be safe.
So the Spanish bank recap cannot work and the euro area is being pushed inexorably toward its moment of truth and the fundamental weakness at the heart of the original design of the euro – that no bank bailout can resolve – is being laid bare, not in the abstract but in real time, with devastating consequences. This newly discovered but elemental characteristic of an economic union – that a lender of last resort is essential – will have to be acknowledged for Spain, Italy and possibly even France as well as for Portugal and Ireland and for Greece, too, if they stay in the euro.. And every time now that the euro area attempts a new set of well-meaning half-measures – further recaps, bank deposit guarantees and the latest “solution,” a banking union – without facing up to the fundamental issue, it makes the endgame even more painful.

Of course Europe’s necessary shift in policy can be dressed up in different ways. Germany and the Europeans have protectionist publics to persuade; the G20 could help that process. China and the oil states could signal that they will back European reform by helping the ECB refinance the outstanding loans of countries like Spain, Italy and France. This could be done directly or through lending to the IMF. The benefit is to reassure the German public that the world is sharing the burden of reigniting growth and to give the private sector confidence to play its part.

But even then higher global growth will remain elusive. With inflation generally low, a globally coordinated Central Bank stimulus is justifiable, but there is now a unique structural imbalance in the world economy that cannot be rectified by a repetition of ordinary post-recession policies. Ten years ago American consumer spending ($10 trillion annually) could propel the world to a higher plateau of growth. Ten years from now Asians, with nearly half of all consumer expenditure, will drive world growth. But we are in transition from an old world to a new one. The world’s biggest producers are already the emerging markets, but the world’s biggest consumers are still the advanced economies. Today neither the Western consumer, who now needs to earn to spend, nor the Asian producer, who needs someone to buy his goods, can drive the world economy forward independently of each other. So high growth will return only when Asians are confident that markets are reviving in the West and when Americans and Europeans are confident they can earn some money selling to the East.

The starting point for China is to expand consumer demand faster than planned and for the West to advance infrastructure investment. The G20 plan I propose is good for Asia, but it is even better for America (which needs to export) and a lifesaver for Europe, which needs a way to escape years of stagnation. If there is a failure of global leadership next week, not only will Europe be condemned to a lost decade but the whole world will pay a fearful price. The lesson I learned in 2009 is that when a problem escalates into a global problem, you need a global solution.

PHOTO: A 1-euro coin is displayed on a Greek drachma banknote in this picture illustration taken in Istanbul, June 14, 2012.  REUTERS/Murad Sezer


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There is so much wrong with what Gordon Brown is saying that it would take a book to refute all the lies.

To put it more succinctly, I see no point in continuing policies that have created a massive global financial crisis, which is exactly what he wants to do.

Yes, the American banks have been bailed out, due to unbelievably ill-conceived “economic” policy by the US Fed, but we are now over 15 trillion in debt and there is NO recovery, nor will there EVER be one.

Why is that?

Because the US banks used the money (and still do) to invest in 3rd world economies, thus continuing to export US jobs as they had done previously.

Only now it is being totally financed by increasing the debtload to the US taxpayers — and there is NO end in sight.

Unbelievably, the US wealthy now want QE3 because the US economy is foundering once again.

However, the US stock markets are near their all-time highs in 2008, which is proof of what I am saying.

The US economy is living proof (actually, “dying proof” is a more apt expression) that massive bailouts to the wealthy class are a gross mistake, because they WILL misuse the money and their demands NEVER end.

Converting the ECB to a US Fed-type institution would undoubtedly yield EXACTLY the same results.

NONE of this is economics.

ALL of it is simply egregious greed by wealthy bankers and investors, who don’t care what happens to anyone else.

This MUST stop here and now, no matter what it takes.

Posted by Gordon2352 | Report as abusive

Sharp line:

The lesson I learned in 2009 is that when a problem escalates into a global problem, you need a global solution.

Posted by Darmesh | Report as abusive

A very interesting and informative article. I feel a little more positive than the former Prime Minister, but agree that this is a global issue and that a coordinated global stimulus is likely; also agree with the comments on the Eurozone needing a central bank with greater powers. But for now, the most urgent matters are stabilising Spain and Italy’s yields and ringfencing Greece. Whatever happens on Sunday, the election should not have the capability to cause this amount of disturbance. Greece evidently does not wish to leave the euro, but there may be an impasse and events may move beyond this decision. Should this happen, protected status should be conferred on the country. It could be Eurozone protected, G20 protected or a combination of the two. It does not seem logical that a very small economy in relation to those waiting and watching so anxiously, should have the power to cause such disproportionate uncertainty. And those Eurozone member states with bailouts should be given a longer time to conform to targets and allowed other easing measures thought necessary. The Eurozone was based on problematic policy and what is presently happening is the beginning of dealing with that and other global economic issues, as Gordon Brown explains.

Posted by MargaretB | Report as abusive

The credit crisis started in the summer of 2007. Mr Brown “saved the world” as he put it in the House of Commons, in late 2009. That’s over two years. The Eurozone leaders are currently just slightly less than two years behind the curve at the moment.

By Mr Brown’s own timetable, it is not yet time to start panicking.

Posted by IanKemmish | Report as abusive

Thank you Gordon Brown for sharing your insights. he who has ears let him/her hear what Gordon says to the leaders.

Posted by Sparetire | Report as abusive

Is Brown suggesting that China and oil states should insure the rentier high interest rates on Spanish and other European debt? While the remainder of the world is experiencing deflation or stagflation, Brown wants to continue the British tradition of extracting punishing rents upon capital to provide a steady flow of income to the aristocratic and non-working classes at the expense of ordinary workers. A tradition that needs to be fore ever put to rest and exposed as the manipulative, exploitative policy for which it is. Cut the interest rates and provide a win-win situation for lender and recipient.

Posted by Greenspan2 | Report as abusive

Right. So what decisive euro action is needed?

Western consumers do not have the ability to increase their discretionary spending. Savings rates are near zero. There is no chance for the West to continue driving factory production in the East, since incomes will drop and unemployment will rise. Investment is stalling because demand is lacking. Private business, no matter what the central bank’s rate, will have trouble tempting consumers.

Posted by eddiefresh | Report as abusive

The moment of truth was back when Gordon Brown and his ilk borrowed more than they could repay. The bank has come to repossess every home on the block. Gordon is begging the townfolk to pay the mortgages. Bugger off Gordon. You don’t live here any more.

Posted by mulholland | Report as abusive

The world has lived upside down till now! The majority population of the world are developing countries so growth needs to come from there! Global policies (infrastructure investments, business collaborations..) aimed at increasing growth in the developing world is the best solution for the world at large and the developed world in particular. This is a desirable imperative for the long term balanced growth of the world on economic, spiritual and human grounds!

Posted by RK_France | Report as abusive

Gordon Brown has been proved right in all his predictions so far about the British and world economy, and I do not doubt he is right again here.
Shame the current British leadership is not of his calibre, but appears more suited to a banana republic.
Whoever provides leadership at the G20 this time, it certainly won’t be Britain!
As a previous commentator said, “those that have ears to hear, let them hear”!

Posted by meg1111 | Report as abusive

Remarkable article.
Mr. Brown’s stark analysis is very convincing.

As for his prognosis, there is no point in thinking in terms of ‘helping Europe’ because doing so would be feasible neither economically nor politically.

It’s up to the European countries to sit around the European bargaining table, and try to find ways to minimize damages each for itself, and among themselves, as they’ve been doing so far, taking into consideration that any talk about economic growth is somehow misplaced in the context of a socioeconomic system that’s lost its relevance for the most part.

Besides, Europe is still rich (on paper) relatively to the rest of the world, and it simply can’t ask poorer nations to finance its failed welfare programs. This doesn’t make sense, and such ideas won’t fly.

As for asking the US for (real) help, it’s a waste of time, especially in an election year, in which the current US administration’s excessive debt accumulation will be in focus.

Europeans should prepare for the worst, while trying not to panic.

Posted by reality-again | Report as abusive

What is important hear, is whether you liked him or not he dose have a lot of insight and access to those that are in the know and thus having read what he has to say we would all be foolish not to pay attention to ignore him . Leaving aside the destructive gambling of the banks, no economy is going to grow unless the working or retired citizen has a growing amount of free cash in his hands , given that current austerity policies and low interest rates have made this impossible all governments are now looking down the barrel of lower tax revenues.We are now in a world of diminishing tax revenues and yet our governments are still inviting Armageddon by pouring billions into bailing out bankrupt banks and incredibly they still allow the giant corporates and the super rich to roam the world avoiding the tax revenues they desperately seek . They also allow in the name of free trade countries to exploit their markets destroying jobs , its not just a competitive issue , its the tax and currency manipulation along with subsidies that make these companies competitive not there product.How can it be right for companies like Amazon and Apple to do something like £14 Billion a year in the UK and not pay a penny in corporation tax , how many manufacturing jobs have been lost because of this tax advantage. I suspect this is going on all across Europe and America.

As for the Banks they need to let them go bust, pick them up from the liquidators for a £1 and re capitalise only the ones worth saving , make them transparent and introduce rapid changes that remove personal and business banking from the speculative propriety trading they are all engaged in . Introduce a global Robin Hood tax to get them to pay for the damage cause and raise revenues that are directly invested in projects that create jobs and build asset value .

Sadly Gordon the idiots at the table will not be able to agree on anything other than a thinly worded statement that will mean bugger all, and mate its pie in the sky stuff if you think China is going to be the saviour. !

Posted by Doovle | Report as abusive

I think…this IS “The Moment of Reckoning” we’ve all been hearing will never come. Just saying…

Posted by WouldChuk | Report as abusive

good EU PLAN B:
Let South be obrero / migrant workers for Euro’s again.
This is how Eu once started.
Form the EU of willing of the North.
North is 80% anyway. what’s the point splitting between workers and spanish educated obrero’s …
Stop the debt AND flow free labour laws and south can pay.
A good economy needs dual labour laws. US/maxicans. Chineese rual workers ect.

Posted by wer12121 | Report as abusive

Gordon Brown is consistent in that he has been singing the same financial hymn since the crisis began. However, his European counterparts for some reason don’t want to tread the path that he advises they walk. Where does this great reluctance come from? Secondly, I think that his idea that the Chinese and the Oil-rich states partly fund European re-capitalisation is venturing into the realm of the fanciful. There is no way that these states would participate in this process as the decline of Europe means the ascension of these nations. Consequently, if they could contribute to European decline they would. It might mean momentary economic hardship on their part, but long term political re-positioning in their favour. The emerging economies do not want to see an all powerful Europe which is able to dictate trading terms as they do now. A politically weak Europe is more to their liking.
Finally, I believe that Mr. Brown is fundamentally wrong that recapitlaisation is the panacea to all European woes. It isn’t. It might be a short term stop gap, but the fiscal union of Europe would be the only long term remedy… and that will never happen! Ergo the only remedy is the reversion of the union to its pre-Euro union in which there was a perfectly sound economic and political cooperation, but not complete integration.

Posted by geniuz | Report as abusive

Investors the world over aren’t sure that the profits generated in the India can be easily and securely repatriated through normal banking channels. G20 meeting should address this simple question: in return for a gauranteed investment in the infrastructural projects in India, can India gaurantee the returns of investments? Indians can be asked to provide all manpower for the security needs the world over, plus contribute software services in return as payment on infrastructural investments in India. Additionally, Indians need to gaurantee export of food grains/rice at a mutually arrived figure. That way, growth environment can be generated the world over.

Posted by kchopra | Report as abusive

What the world needs more than anything else are policies to stimulate economic growth. What seems to be causing a lot of the problems in the Eurozone is too much austerity as this goes contrary to creating growth. Here I blame Germany’s Angela Merkel for insisting that the austerity route is the best way forward. This attitide is driven by what happened to Germany in 1923 with hyperinflation. However, when there is economic growth it then becomes easier to clear one’s debt.

Gordon Brown states “Austerity means decreasing economic activity and then an ebbing of confidence” – he is 100% correct there. World leaders must take note of this and listen to the likes of François Hollande.

Posted by chrisb1959 | Report as abusive

Take no notice off what Gordon Brown is saying we have all been there and we are all bust

Posted by bjhb | Report as abusive

A couple of basics about real CAPITALISM

1. If a private sector entity can’t pay its bill when
they fall due it is insolvent and should be resolved
or liquidated
2. An industry that pollutes (i.e. transfers costs and
lossses onto taxpayers and society)should have to
pay for the cost of its effluent and/or have its
activities curtailed.

The Greenspan/Bernanke/Geithner doctrine of the last 15 -20 years has been to continously bail out the financial sector, in effect transferring the latters losses/costs onto society and taxpayers (usually via the central bank backdoor).

Angela Merkel realises better than most that the costs of this doctrine has reached its limits(one just has to look at government debt levels in Japan, UK, USA, Ireland, Spain) and that we need to change course.

Cries by the financial sector for yet more bailouts (via central banks) will eventually lead to even greater debt burdens on society and a substantial loss in value in fiat money and destruction of REAL WEALTH.

We can start changing this by
1. Allowing financial sector participants who invest in
insolvent banks or in sovereigns that can’t pay their
debts to take their losses (either up front or by
requiring the financial sector to pay for the related
losses over a number of years via a financial
transaction tax)
2. Having a proper bank resolution regime and the will
to use it. Sheila Bair at the FDIC and the Iceland
government showed that this can still de done.

3. Requiring banks to increase their capital, liquidity
and term funding levels substantially so that if
losses do occur they are borne by bank shareholders
first. Regulators need to restrict cash dividends,
cash bonuses and share buybacks until a solid capital
base is achieved.

4. Large banks need to be broken up to minimise the
costs to society should they fail.

5. Banks now treat central banks as 24/7 providers of
liquidity – bank wholesale debt providers were
willing to provide finance to banks at 3O times
leverage because they took it for granted that
Central banks would bail them out if required.
Central banks need to impose much more conditionality
on their funding (other than just pure collateral) –
eg they should be able to set restrictions around
dividends, bonuses,and share buybacks etc and mandate
disposals/breakups where required.

Re Mr Brown comments, the simple reason that many wholesale investor won’t provide certain EU banks with funding is that they think they have’nt got enough capital – these banks are easy to identify – they are the ones that the ECB has had to provide LTRO funding to -to fix this problem just get the ECB to convert its LTRO funding into equity in effect performing a large scale bank recapitalisation in one swoop.

Secondly if the G20 is serious about sorting out Europe sovereign debt issues then just get the G20 to agree to a worldwide financial transactioon tax. The EU could then transfer a sizeable portion of EU peripheral debt into one resolution fund and use their share of the financial transaction tax to pay it down over time.

Posted by Maunsell | Report as abusive

I am not sure why you are even reporting comments by Gordon Brown, we have all been there and done it, and he dose not know what he is talking about

Posted by bjhb | Report as abusive

Why does Reuters still give a mouth piece to this deluded and incompetent ex chancellor / pnoney PM(never elected PM?)
He was a main culprit at the scene of the crime that is now the banking crisis.

Posted by barry66 | Report as abusive

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