European fiscal woes set to dominate G20 meeting in Mexico

By Andre Stahl Feb 23, 2012, 12:31 GMT

Mexico City - European Union leaders will likely call for a substantial increase in the funds available to the International Monetary Fund (IMF) when finance ministers from the world's 20 biggest economies meet at the weekend in Mexico City.

However, G20 members are divided on the issue. The United States, in particular, is hesitant about ploughing more money into the IMF's coffers to battle the global economic crisis, and argues that it is time for the Europeans to take more strain.

German Finance Minister Wolfgang Schaeuble is expected to use the G20 meeting to promote the latest Greek rescue package as a further step in the stabilization of the eurozone.

However, US Treasury Secretary Tim Geithner is expected to make clear that there will be no horse-trading with Berlin on IMF resources.

The US wants the eurozone to first stump up more money to resolve Europe's sovereign debt crisis and to create its own firewall before consenting to committing more funds to the IMF, which is strongly influenced by the US and has its headquarters in Washington DC.

It is unlikely that the G20 will reach any kind of a concrete agreement on IMF funding this weekend, with negotiations expected to continue right up until the next meeting in April.

The IMF is looking to more than double its financial war chest by raising an extra 600 billion dollars to help countries cope with the global debt crisis.

The organization currently has 386 billion dollars at its disposal. The majority of its crisis intervention initiatives and preventative credit facilities are linked with Europe. However, the increased war chest is not meant to benefit only Europe, but countries across the globe.

The eurozone countries want to commit about 150 billion euros (198 billion dollars) in bilateral credit to the IMF, with the German Bundesbank contributing 41.5 billion euros to the total.

The Americans have already turned down the proposal. With US presidential elections looming, the country is acutely aware of its own huge budget deficit and wants the Europeans to show greater determination in dealing with the crisis.

Other G20 countries are also believed to be pressurizing EU leaders to free up more capital to prevent any contagion from the eurozone crisis.

For countries like Brazil and China, meanwhile, the issue is more about increasing their influence at the IMF.

Germany has firmly ruled out increasing the European Stability Mechanism (ESM), which is to come into force in July this year, above the agreed 500-billion-euro figure.

The situation of Italy and Spain on the international bond markets has meanwhile eased in recent weeks.

'The position is no,' German government spokesman Steffen Seibert said ahead of the G20 meeting.

IMF Managing Director Christine Lagarde is not the only one calling for the 250 billion euros from the European Financial Stability Facility (EFSF) to be pooled with ESM funds, which together would add up to a firewall of around 750 billion euros.

The European Central Bank (ECB) has also promoted the idea, which explains why the IMF has so far left open how it will involve itself in the second Greek rescue package.

However, EU leaders argue that a global answer is needed to solve a global crisis and that the 17 eurozone countries are playing their part through the euro rescue funds and contributions to IMF funds.

They say there has never been a crisis where the most affected region was expected to pay an additional contribution.

The cost of the financial crisis of 2008 and 2009, which had its origins in the US, was spread evenly across the global community, with the IMF seeing its funding tripled.

The Europeans believe they can convince other G20 members that it is not a good idea for each region to finance itself in a time of crisis.

It remains unclear how much support the European position will receive.

It is also uncertain whether it is as urgent as previously thought for the IMF to receive such a huge injection of funding, as the financial markets have settled considerably.

Even the IMF now believes its latest economic growth predictions are too pessimistic, while EU leaders want to decide in March whether the eurozone needs a higher firewall.

The G20 ministers will meet again in April in Washington. That will be the last chance to reach an agreement before the G20 summit in Mexico in June.