Q&A: What's at stake at the G20 summit?

By Laurence Knight Business reporter, BBC News
Continue reading the main story
Global Economy

* Greece turmoil
* Euro deal at a glance
* What's the matter with Italy?
* Eurozone crisis explained

The leaders of the G20 group of major world economies are due to gather in Cannes amid a global financial crisis and fears of a recession.

And it's not for the first time.

After the 2008 financial crisis, the G20 came into its own as leaders from China and India worked alongside those of the West to head off a global financial meltdown.

But in more recent years, leaders have found it much harder to find common ground over economic and trade adjustments.

So what are the key issues this time round?

The eurozone. And the global economy.

Greece is in political turmoil, after Prime Minister George Papandreou said that the latest bailout deal should be put to a national referendum.

But the Greek public is very angry. If they vote no - or if the Greek government collapses first - Greece may end up going its own way, for instance by choosing to stop repaying its debts, or by leaving the euro.

That has got the markets in a tizz.

Meanwhile, according to the International Monetary Fund among others, the global economy is precariously teetering on the edge of another recession.

Greece is a small country. Why should the G20 care?

What happens in Greece raises big questions about the eurozone as a whole.

Lenders are getting nervous about lending to Italy, which also has a lot of debt, but which is a lot bigger than Greece.

If Italy found it impossible to borrow, it would also find it impossible to repay its existing debts.

European banks have lent a lot of money to Italy and other troubled eurozone governments. And other banks throughout the world have lent a lot of money to Europe's banks.

So the debt crisis in Europe threatens a possible chain reaction of government and bank failures similar to what happened in 2008.

Doesn't Europe already have a bailout arrangement for Italy and the banks?

European governments agreed to increase their bailout fund from 440bn euros to about 1tn euros. And they want their banks to increase their capital - their buffer against losses - by a further 106bn euros.

But there are several problems.

First, they want countries like China to contribute money towards the bailout fund.

Second, the agreement needs to be ratified by all 17 eurozone parliaments, and Greece is already looking flaky.

Third, even before Greece's referendum announcement, markets seemed to have lost confidence in the bailout deal, and in Italian debt in particular.

Why would China and the others agree to help Europe out?

There is an element of self-interest. If the eurozone unravels - for example if Italy went bust - it could result in another global financial crisis and recession, which is no good for anyone.

But China may attach strings to any loans, such as being given more access to European markets or getting political support in its disputes with Taiwan or the US.

It is also possible that China would demand guarantees from Germany and other stronger eurozone countries for any money they lend to Italy, which rather defeats the point of asking for their money.

Some economists say that China also has an interest in buying the euros it would need to make the loans, as this would tend to push up the euro's value, giving Chinese exports a competitive advantage.

What if the eurozone bailout deal fails?

If Greece reneges, or another country does, there could be a major global financial crisis.

Indeed, the crisis may be coming anyway, as many economists warn that the latest bailout deal is inadequate to rescue Italy.

So a big item in leaders' minds will be contingency planning - how to insulate their own banks and their own economy from another financial panic.

There is likely to be pressure from other countries for the Europeans to do more, for instance by increasing the size of the bailout fund to 2tn-3tn euros, or by making the banks raise even more capital.

Many economists, particularly in the US, say that the only real solution to the crisis is to get the European Central Bank to cut interest rates and to print the money needed - something it has steadfastly resisted until now.

What about the rest of the world economy?

The US and UK economies have slowed sharply in recent months, and there are fears of a recession irrespective of what happens in the eurozone.

China meanwhile is having to deal with the dilemma of high inflation coupled with a stagnant manufacturing sector.

There has been a lot of talk of a possible "hard landing" for the Chinese economy, which has relied increasingly on debt-fuelled investment in infrastructure and housing to continue its rapid growth during the last few years.

Another financial crisis and global recession could expose large bad debts in China, tipping its economy over the edge and risking social unrest.

The eurozone crisis is already pushing the West towards recession by preventing the banks from lending, and by undermining business and consumer confidence.

What can they do to head off a recession?

Last time the world faced crisis and recession in 2008-09, the G20 came together to agree big spending increases by governments and interest rate cuts by central banks.

However, both policies are much harder this time round.

Many governments either cannot spend more (Italy), are afraid to do so (the UK), are already spending flat-out (China), are sceptical of the merits of government spending (Germany) or face major political obstacles at home (the US).

Meanwhile, it is much harder for central banks in the UK and US to help their economies, because interest rates are already practically zero and cannot be cut any further.

They can print more money - through "quantitative easing" - but if it is not coupled with more government spending, the effectiveness of this policy may be limited.

The European Central Bank has the most scope to stimulate its economy. It could cut its interest rate from the current 1.5% to zero. And it could print money and buy up the debts of Italy and other countries.

But the man of the hour - Mario Draghi - only just installed as the ECB's new president, and nobody is entirely sure what he thinks or whether he could convince others at the bank to change course even if he tried.

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