Time to act: euro collapse would define our era

Lawrence Summers

It looks like the G20 on Friday will emphasize its new “framework” for curing macroeconomic imbalances, rather than any substantive measures to regulate banks, derivatives, or any other primary cause of the 2008-2009 financial crisis. This is appealing to the G20 leaders because their call to “rebalance” global growth will involve no immediate action and no changes in policy – other than in the “medium run” (watch for this phrase in the communiqué). When exactly is the medium run?

Another G20 summit meeting has come and gone. The heads of the eight leading industrialized nations, the G8, met first on Friday and Saturday, followed by the full G20 complement, representing the twenty most important global economies. The primary agenda for this summit was the global financial system and the world economy. Throughout the meetings, pronouncements of shared financial goals and economic cooperation were so frequently and publicly communicated as to become cliche, …not entirely unexpected for these kinds of events.

The timing of China's exchange rate move is hardly accidental. The Chinese have said they will "increase the flexibility" of the exchange rate "to benefit the domestic economy". But in the very short term, it is in Toronto where the benefits will most clearly be felt.

Should international investors worry less about the euro? The voice for calm would say yes. True, financial markets have been spooked this week by aggressive German rhetoric - and action - against speculators. But it's hardly news that European governments want to rein in the financial system in key respects over the next few years. And, as yesterday's key US Senate vote confirmed, the Europeans aren't the only ones.

UK Prime Minister Gordon Brown urges G20 leaders at next week's summit to take action to reform the world's banking system.