Europe won support from world leaders yesterday (19 June) for an ambitious but slow-moving overhaul of the eurozone, even as pressure built in financial markets for quicker solutions to its debt crisis that threatens the world economy.
Europe told a Group of 20 summit it intends to work on concrete steps to integrate its banking sectors, a major step long pressed by the United States and other nations to break the cycle of debt-laden countries bailing out their troubled banks which only pushes governments ever deeper into debt.
US President Barack Obama said the sense of urgency amongst European leaders was clear and they knew what steps were needed to "break the fever" of an escalating debt crisis.
"None of them are going to be a silver bullet that solves this thing entirely … in the next week or two weeks or two months, but each step points to the fact that Europe is moving towards further integration rather than break-up," Obama told reporters at the end of the two-day summit in a Pacific resort.
International Monetary Fund chief Christine Lagarde hailed the progress saying "the seeds of a pan-European recovery plan were planted."
G20 leaders now await a European Union summit next week where European officials say they will launch the long process of deeper integration, starting with a push for banking union, with an aim of finalising a broad plan by December.
Financial markets have yet to be convinced about the chances of agreement. Germany has resisted taking on eurowide financial risks if its citizens have to foot too much of the bill, while others, such as France and Italy, want to move more quickly.
Although the danger of Greece crashing out of the eurozone eased after weekend elections, risks are mounting that Spain, the eurozone's fourth-largest economy, will need a full-blown international rescue as its longer-term debt yields hover above 7%, a level that has forced other euro countries to seek bailouts.
The tensions over the world economy and the round-the-clock discussions contrasted with the laid-back atmosphere of Los Cabos, a beach resort at the tip of Mexico's Baja California. The summit declaration was drafted at a hotel next to the adults-only, clothes-optional Desire Resort and Spa.
Roadmap for the eurozone
G20 leaders found common ground that Europe, the world's richest region, must intensify its immediate efforts to stabilise indebted eurozone countries while laying out a clear plan for building financial, fiscal and political union as the path to save monetary union.
"The Los Cabos G20 delivered more commitments than expected. The Europeans upped the ante and publicly committed to institutional upgrade for the banking system and fiscal situation of the EU," said Yves Tiberghien, political science professor at the University of British Columbia.
In the G20 communiqué, euro area countries pledged to "take all necessary policy measures" to safeguard monetary union. Europe also intends "to consider concrete steps towards a more integrated financial architecture", including common banking supervision, bank recapitalisation, winding down of failed banks and guarantees for bank depositors, it said.
These steps would help break the link between government debt and banking problems. Combined with fiscal discipline and measures to support growth, they represent "important steps toward greater fiscal and economic integration" that lead to lower borrowing costs, the G20 communiqué said.
Other G20 countries also signed up to measures designed to support a global economy that has slowed to about a 2.5% pace. Those with budgetary leeway stand ready to coordinate on fiscal stimulus measures, if economic conditions deteriorate significantly.
The United States pledged to avoid a potential big shock to its economy in early 2013 when tax cuts are due to expire and spending cuts take effect, the communiqué said.
Italy put forward a potentially controversial proposal for the eurozone's rescue funds to start buying debt of stricken eurozone countries, such as Spain and Italy, to start lowering their financing costs, European officials said.
French President François Hollande said the idea was worth exploring. Italian officials have said the plans would be discussed at a meeting of finance ministers this week. But Germany said no specific initiative was discussed in Los Cabos.
Leaders from the G20 countries representing more than 80% of world output held two days of talks (18-19 June) in Los Cabos, Mexico, with the aim to prioritise growth and job creation against a backdrop of a weakening global economy.
The BRICS (Brazil, Russia, India, China and South Africa) also pledged to increase their contributions to the International Monetary Fund - which has been seeking to boost its finances to prevent any future financial crisis.
BRICS nations also offered to contribute $10billion (€7.8 billion) to the IMF each in exchange for voting reforms that would give them greater influence in the organisation.
China also pledged $43 billion (€34 billion) to the IMF's crisis intervention fund, which has almost doubled to $456 billion (€360 billion).
The World Bank last week lowered its forecast for global growth in 2012 to 2.5% and said developing nations faced a long period of financial market volatility and weaker growth.
- 22 June: France, Germany, Spain and Italy hold mini summit in Rome.
- 22 June: Germany-Greece quarter final football match at Euro 2012 in Donetsk.
- 28-29 June: Formal EU summit in Brussels to finalise growth agenda and discuss roadmap for greater European integration.