Greece election: international action needed more than ever

As world leaders gather at the G20 summit in Mexico, Larry Elliott warns there are no good outcomes to the euro crisis
G20 summit
Soldiers in Los Cabos, Mexico on the eve of the G20 summit. 'It would be naive to imagine that the G20 is preparing a blueprint for global recovery,' says Larry Elliott. Photograph: Bertrand Langlois/AFP/Getty Images

If there was ever a time when international economic cooperation was needed, it is now. The situation in the eurozone, and around the globe, was catastrophic before Sunday's second Greek election. The result changes little.

All eyes now turn to the financial markets and today's summit of world leaders in Mexico. There were high hopes for the G20 when it met for the first time in Washington in November 2008. Then, the conclave of the big nations proved they were up to the challenge of responding collectively and decisively, if not with lasting success, to the contraction in the global economy triggered by the collapse of Lehman Brothers.


Conditions have markedly deteriorated since the first Greek election in May. The outgoing president of the World Bank, Robert Zoellick, says he can detect growing signs of protectionism and economic nationalism. Extreme parties are on the rise. The eurozone crisis has engulfed Spain and is lapping at the door of Italy, yet a break-up of monetary union is still seen as an impossibility in Europe's capitals. There is, though, no sense that Europe has a plan for averting the doomsday scenario and that is why fear stalks the markets and – in the words of Bank of England governor Sir Mervyn King – a black cloud has descended over the global economy.



At root, the current crisis is the result of the imbalances in the global economy, which in turn reflect differences in productivity and competitiveness. The show could only be kept on the road in the boom times because countries like China, Japan and Germany were prepared to finance the deficits of the US, Britain and the weaker members of the eurozone. To tackle Europe's problem therefore means tackling the competitiveness question. This can only be done in a number of ways: by a long and brutal process of austerity that reduces the cost base of the weaker nations; by Germany and the richer nations of the north eroding their competitive advantage by tolerating a higher rate of inflation than the nations of the south; by a permanent process of fiscal transfers that will probably exceed the assistance provided to the länder of the old East Germany; or by countries seeking to generate an instant competitiveness boost through departure from the euro. As it stands at its crossroads, Europe has to choose one of these four routes, something it appears incapable or unwilling to do.

Sooner or later, a country like Greece may decide it cannot take the strain any more and conclude there will be first-mover advantage in being the first country to leave the euro, just as there was for the first country – Britain – to leave the gold standard. This, whatever European policy makers say, would result in mayhem. The rest of the world knows this, and that's why Obama is constantly on Angela Merkel's case and why King announced steps last week to boost mortgage and business lending, and to keep UK banks awash with liquidity.

These moves are welcome precautions, if somewhat late in the day. They should do some good, although perhaps not as much as the government hopes.
