The last time we heard from the G20 they were pledging some sort of EMU resolution by November 4th. This weekend they reconfirmed this support and provided a few more details. The key statements follow (via Reuters):
“Those with large current account surpluses will also implement policies to shift to growth based more on domestic demand. Those with large current account deficits will implement policies to increase national savings. ”
“…We remain committed to take all necessary actions to preserve the stability of banking systems and financial markets. We will ensure that banks are adequately capitalized and have sufficient access to funding to deal with current risks. “
So the two statements make their perspective very clear. They will continue to impose austerity on the periphery nations with the assumption that this will fix the EMU crisis. It won’t. But the more important message for markets is the banking statement. They’ve made it now crystal clear that the banks will remain well capitalized. This means they’ve eaten the Tim Geithner rhetoric hook, line and sinker.
As previously mentioned, this all remains very bullish from a market perspective (even though it is not stimulative) as no one wants to get in front of the G20 train that is headed down the tracks on November 4th. After that, we can probably get back to crisis as usual as fixing the banks doesn’t fix the EMU. Ultimately, this crisis is going to require fiscal transfers of some sort combined with debt restructurings. The Germans are hoping austerity and bank recapitalizations (both beneficial policies for them) will fix this. I fear it won’t be enough and just like the USA, the bank bailouts will prove meaningless without a sizable fiscal effort. A true fix to the EMU will involve a rebalancing mechanism that resolves the trade imbalances and removes the solvency risk (e-bonds, central Treasury, etc). Until then, this is all just can kicking….