I took some real ‘heat’ last week at the Shanghai Conference on Asian and Pacific G20 Leadership when I suggested that Eurozone sovereign debt crisis was a distraction for the G20.

More recently one of my ‘policy buddies’, Thomas Wright, recently of the Chicago Council on Global Affairs, took me to task as well  Here is part of what he said in an e-mail:

The EU will not (and probably cannot) solve this crisis. What would work (transfer union) is not politically viable and what is politically viable (muddling through) will not work. This is not going to change. If anything it will get worse. Either the world acts in a massive and coordinated way to engineer a bailout or the crisis probably brings everyone down with it, including the US economy. More and more economists (incl Eichengreen, Rajan) have been making this point recently and calling for IMF/ G20 intervention.

Well I’m not yet prepared to cede ground on this.  First, what is the problem.  At its simplest Graham Bowley and Liz Alderman of the FT put it succinctly : “The problem – too much debt and not enough growth to ease the burden – could take years to resolve.”  The worst consequences that might arise from failure according to the two are not pretty:

If governments can’t agree on how to rescue Greece from its debilitating government debt, some fear the worst could happen – a collapse of the financial system akin to 2008 that would ricochet around the world, dooming Europe but also the United States and emerging countries to a prolonged downturn, or worse.

The major thrust of those encouraging G20 intervention and involvement in the sovereign debt crisis in the EU is the threat of contagion in terms described above.  And there is no question that the G20 countries including especially the United States should at least continue to press the leading powers in Europe – read this as Germany and France – to ‘suck it up’ and do the right thing.  These and other EU governments need to backstop both the European Central Bank to add the necessary reserves and to recapitalize German and French banks and they probably need to do this as well – establish an orderly default process for Greece.

Now why do I identify this major economic crisis as a distraction for the G20.  In part I argue this because there are growing signs  that the current host of the G20, France, and its President is in fact distracted in a major league way.  There is growing concern that the French are dropping the ball on agenda setting for the G20.  There are worries that the possible G20 deliverables are being delayed for the Mexican Leaders Summit in June 2012.  This raises doubts, especially among the global media, that the G20 is performing at all up to the steering committee function that observers keep looking for in the G20 Leaders Summit.  As Dan Drezner suggested in a blog post from the Shanghai Conference: “One of the takeaways from my conversations so far in Shanghai has been a sense of disappointment about what the next G-20 summit in Cannes will accomplish.”

As evidenced by this sovereign debt crisis, the G20 Leaders Summit is suspended between crisis and permanent steering committee.  And while this is unfortunate and untimely clearly the G20 is presented with a crisis and at the same time the G20 is struggling to make progress on the Strong Sustainable and  Balanced Growth Framework – which is a medium term policy issue.  The G20 cannot focus laser-like on medium term policy tasks – in the face of the turbulence and volatility of the global economy.  Nor can it be said that the leadership has rushed to resolve the sovereign debt problem.

Now this takes me back to the crisis and why this is a distraction rather than a priority for the G20.  Yes, President Sarkozy and his people are off trying to ‘plug holes in the dyke’ in the Eurozone.  But it is more than that.  And Tom Wright put his finger on it – the Europeans are unable to solve this crisis because what is needed is politically unpalatable to Germans, French and Finns.  But surely that failure doesn’t lead to the G20 to step in.  The G20 can’t pull Europe’s ‘bacon out of the fire’.

The G20 has much to recommend itself as a coordinating body for global governance.  But it is not to step in for Europe’s feeble institutions and growing popular unhappiness in the more efficient and productive parts of the EU for the crisis at the periphery.  The G20 needs to continue to cajole the Europeans to tackle the problem and the leadership needs to turn back to critical economic reform problems that appear to be going unaddressed.