On the most urgent issue of the day, one that has already cost global stock markets $4 trillion and which threatens a recession that could make 2008 look like a bump in the road, they simply agreed to differ. Their bland communique concluded with pious hopes that Greece should remain within the euro and an agreement "that the right measures are not the same for each of us."
This is diplomat-speak for German Chancellor Angela Merkel digging in her heels and refusing any thought of a joint eurobond backed by the full weight of Germany and all the other eurozone partners. However beneficial the euro has been for the wondrous German industrial machine, Merkel stands firm on her conviction that European solidarity has its limits.
Even the combined pressure of the other Western leaders at the G8 summit didn't move her. U.S. President Barack Obama stressed that the eurozone crisis was "of extraordinary importance." Italian Prime Minister Mario Monti, the only trained economist among them and who was asked to lead the discussion Saturday morning on the global economy, stressed the need to restore demand, saying, "I think we should regard it more positively than the most conservative European authorities do."
Grexit, the vogue term for a Greek exit from the euro, is slowly but surely becoming inevitable. The implications, for Europe and the global economy, are deeply alarming.
A study by Barclays last week suggested that the immediate costs of a Grexit would be $371.5 billion for the eurozone members, of which Germany would be liable for around $108 billion, France for $80.8 billion, Italy for $71.5 billion and Spain for $47 billion.
The first point here is that Spain, currently paying more than 6 percent interest to borrow money, doesn't have the $47 billion, and Italy, current paying almost 6 percent, would be very hard put to find it. And the new government of France's Francois Hollande would also face extreme difficulty.
The second point thus follows; a Grexit wouldn't stop with Greece. The level of uncertainty such a disaster would inspire in world markets would freeze a great deal of economic activity. Banks would stop lending to one another, companies would stop investing, consumers would slow their spending as they all waited to see which would be the next shoe to drop. Portugal, Ireland, Spain and Italy would all come immediately into the crosshairs.
Mark Cliffe of the ING finance group has looked at a best-case and worst-case scenario. Under the best case, in which a Grexit is sealed off from the rest of the eurozone and the European Central Bank floods the zone with money to keep the other target countries afloat, he sees a minimum 2 percent fall in output across Europe over the next two years. That would worsen unemployment, deficits and debts.
Under the worst-case scenario, a disorderly breakup of the eurozone, Cliffe sees German output falling a dramatic 7 percent and, even outside the euro, British output dropping 5 percent.
Given the latest reports of depositors moving money out of Spanish and Italian banks, this is probably optimistic. Assume that the European Central Bank does step in (since if it didn't, a Spanish debt default becomes horribly probable). The sums required to refinance Portuguese, Spanish and Italian and possibly French debts as they come due quickly head north from $1.27 trillion.
So at the same time, the eurozone's national governments would be forced to find new money to bail out their stricken commercial banks, and they would have to find it from the European Central Bank. That sends the demands on the ECB heading north to $2.5 trillion.
At the same time, governments have to finance national budget deficits or cut spending by draconian sums. The whole of Europe would be facing the dismal Greek spiral of rising unemployment and social misery, leading to lower tax revenues and bigger deficits. The ECB is now looking at something more than $3.8 trillion. Surging inflation would be just one result. And Angela Merkel could forget any prospect of re-election next year.
And of course Europe isn't alone. The collapse in Europe's imports from China (the cost of shipping a container from Shanghai to Europe has dropped 40 percent since August) is intensifying the slowdown in China. The Chinese property bubble is deflating fast, with real estate sales in the first quarter of this year down 14.6 percent from a year earlier, a residential sales down 17.5 percent, even as the floor space for sale rose 47 percent. Foreign funding for Chinese property development was down 91 percent in March and 81 percent in April.
The G8 meeting just inched up to the abyss but the world leaders involved refused to open their eyes. Operating on a political timetable, Angela Merkel says she is now waiting for the next Greek election next month. The markets may not be so patient.
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