To-Do Lists Now Need Creativity—And Doing

They came, they met, they wined (and whined), they dined, they talked, and they left. Perhaps the best proof of the mounting irrelevance of the gathering of finance ministers, central bankers, and assorted world leaders at the annual meeting of the World Bank and the International Monetary Fund this past weekend in Washington was the dog that didn't bark: There were no significant anticapitalist demonstrations or riots, such as those that were once a regular accompaniment of these meetings.

If further proof is necessary that these financial policy makers matter less than ever, it was provided by journalists on the leading financial news channel, CNBC. They could not conceal cynical smirks—and in some cases outright chuckles—when reporting that the Group of 20 had released a communiqué pledging "a strong and coordinated international response to address the renewed challenges facing the global economy."

Alas, the members of the G-20 are short on credibility:

• The European members have squandered theirs by issuing a stream of meaningless communiqués restating their intention to stem the rot of the euro zone;
• The Americans have proved incapable of agreeing on policies to bring their debt under control or lower the unemployment rate; and
• The Chinese, major contributors to world imbalances, announced that if Europe is looking to it to bail out the euro zone, it should, as we say in New York, fuggedaboutit. Indeed, the Bank of China, that nation's biggest foreign-exchange lender, has stopped dealing with some European banks on ordinary currency transactions.

Perhaps the only good news for America is that we no longer are seen as the sole perpetrators of all that ails the world economy. Reports coming out of the meeting reveal that China, America, Canada and others are now heaping pressure on the Europeans, with China's central bank governor, Zhou Xiaochuan, warning that "the sovereign-debt crisis in the euro area needs to be resolved promptly to stabilize market confidence."

The zone's economies are sliding into recession, with growth stalled, and U.S. Treasury Secretary Timothy Geithner now has allies in his battle to get Europe's policy makers to do what it is increasingly clear they have to do, if we are to avoid another Lehman Brothers-style world-wide financial crisis. One imagines that cries of "Doctor, heal thyself" were heard in the hall.

Perhaps the only good news is just that: Policy makers now know what they have to do, and need only muster the political will to do it. On both sides of the Atlantic it is now clear that austerity alone will not solve the problems of the overly indebted nations.

Experience with austerity in Europe demonstrates that cutting spending and raising taxes slows economic growth so drastically that the economies shrink faster than the deficits, raising deficit-to-GDP ratios and increasing joblessness.

EU employment commissioner Laszlo Andor told a meeting of the European Parliament last week, "There is clearly a correlation between tough austerity programs and the rise of unemployment."

That correlation, however, is man-made. It is one thing to cut spending and raise taxes while avoiding fundamental growth-inducing reforms. It is quite a different thing to bring bloated government budgets and public sectors under control while at the same time instituting reforms that address what World Bank President Robert Zoellick calls "fundamentals that are out of sync."

In the near term, an orderly default by Greece and other countries has to be organized. Greek Finance Minister Evangelos Venizelos is reported to have advised a meeting of Socialist MPs that a default, with a 50% haircut for creditors, is his nation's best way out of its current crisis.

But as Mr. Zoellick points out, that leaves the hard work still to be done.

Europe's banking system needs a capital infusion of some €200 billion ($270 billion), according to the IMF. Many attending the meetings thought that a low estimate, in part because the IMF also estimates that the hit taken by banks' capital from the euro-zone debt crisis comes to €300 billion. Dorothea Schäfer, research director at the German Institute for Economic Research, says the 10 largest banks in Germany alone need €127 billion to get their equity ratios to the minimum acceptable level of 5%.

And every day seems to bring bad news, the latest being the report by José María Roldán, Spain's bank regulator, that his country's banks are in worse shape than he only recently reckoned, and the downgrading of seven Italian banks by Standard & Poor's. But eurocrats remain eerily calm. Olivier Bailly, spokesman for the European Commission, responds that "there had been no acceleration of the timetable" for recapitalizing the eight banks that failed the unstressful stress tests, or the 16 that barely squeaked through and are judged "fragile."

The effects of a European banking crisis, according to the IMF, "are amplified through the network of highly interconnected and leveraged financial institutions." Fears of European "contagion" have hit the shares of U.S. banks; France's largest banks, short of dollars, are cutting the supply of credit to U.S. borrowers; and investors in America now start their days digesting confidence-shattering bad news from European markets along with their breakfasts.

Recapitalizing Europe's banks, using privately raised capital and taxpayer money is one of the items on Mr. Zoellick's (and IMF Director General Christine Lagarde's) to-do list. The other is a decision by euro-zone policy makers to "address the fundamentals…[and] create a fiscal union that is commensurate with the monetary union." That is indeed the end of the road down which euro-zone leaders repeatedly kick the proverbial can. And which Germany, understandably, is so reluctant to travel.