When the world’s top finance ministers and central-bank chiefs meet in Dresden this week, they may struggle to stick to an agenda set by their German hosts that doesn’t mention Greece.
The Group of Seven meeting starting on Wednesday will officially focus on big-picture themes of economic growth, tax evasion and strengthening the global financial architecture. Yet the most pressing matter for many of the policy makers attending is whether Greece can stay in the euro, and whether the world can handle the consequences if it can’t.
Time is running out for the Mediterranean country to reach agreement with its German-led creditors over economic reforms needed to unlock bailout funds before loans from the International Monetary Fund come due next month. That’s leading non-European observers, like officials from the US Treasury, to warn of unpredictable consequences if Greece and its partners don’t manage to avert a default.
“There are no major pressing issues related to currencies or trade to be discussed,” Christian Schulz, an economist at Berenberg Bank in London, said in an interview. “The worry on everyone’s mind will of course be Greece, and the message for Greece is going to be that it has to do what it takes to save its economy.”
While the G-7 doesn’t have a mandate to decide how to deal with Greece, it brings together together officials from the euro area’s three biggest economies, as well as the European Central Bank, the International Monetary Fund and the European Union — the institutions backing the 240 billion-euro ($262 billion) aid package that expires next month.
At a former palace of Saxon princes and kings, German Finance Minister Wolfgang Schaeuble and Bundesbank President Jens Weidmann will host their counterparts from France, Italy, Japan, the UK, Canada, and the U.S.. International Monetary Fund Managing Director Christine Lagarde, European Central Bank President Mario Draghi and Eurogroup head Jeroen Dijsselbloem are all scheduled to attend.
A Treasury official said Secretary Jacob L. Lew will urge a constructive, pragmatic outcome to the current round of negotiations.
Still, as together the seven nations account for almost half of world economic output, Germany wants keep the Dresden meeting on global themes. That includes Schaeuble’s push for debt reduction and fiscal restraint that Germany is promoting for the euro area and beyond.
Germany intends to use the G-7 event to push for countries to close gaps in financial regulation by implementing globally-agreed rules. It will also argue in favor of international controls to prevent large corporations from shifting their profits across borders to minimize tax, and the sharing of tax information to combat evasion.
For all the international cooperation, Schaeuble said this month that he still expects to come under fire at the meeting for his country’s austerity-focused approach to the euro area’s woes. The U.S. has previously called for a quicker fix to Greece’s problems, hinting that it views Germany’s insistence that Greece fulfill bailout terms as a risk in itself.
While differing over strategy, G-7 officials may seek to reassure each other that they’re equipped to manage the fallout should agreement not be reached on Greece. Bank of France Governor Christian Noyer said on Tuesday that he doesn’t see “any particular” risk for banks and insurers related to a departure of Greece from the euro zone.
Compared to previous flare-ups in the sovereign debt crisis, the euro area has more tools now to deal immediately with turmoil, such as the ECB’s unlimited bond-buying backstop, known as OMT, said Lefteris Farmakis, an analyst at Nomura International Plc in London.
“A more relaxed attitude toward the risk of contagion is normal, as compared to 2012 we now have quantitative easing, OMT, progress on fiscal consolidation and the financial linkages are nonexistent,” he said. “But there might be an impact on confidence in the future, with people wondering about the possibility of an exit every time a problem arises in one of the periphery countries.” [Bloomberg]