With financial markets continuing to swoon this week, many investors are looking to the gathering of policymakers at the annual meetings of the International Monetary Fund and World Bank for a sense of direction. They are almost certain to be disappointed.
The global economy is facing the biggest set of risks since the collapse of Lehman Brothers Holdings three years ago – the sovereign debt crisis that threatens the euro, economic stagnation in the United States, record-low policy rates that fuel volatility in financial markets. But in stark contrast to 2008, when developed and developing countries coordinated to stimulate economies and stabilize banks, policymakers today seem incapable of providing leadership.
European officials spend most of their time here so far explaining why Europe’s complicated institutional and political arrangements prevent them from taking faster, bolder action to stem the debt crisis. American officials are conspicuous by their absence, perhaps understandable given the negative market reaction to the Federal Reserve’s policy twist on Wednesday. Finance ministers and central bank governors of the so-called BRICS nations – Brazil, Russia, India, China and South Africa – sought to fill the void with a joint statement and news conference but disappointed hopes that they might offer financial support to Europe.
A feeling that no one is in charge of the global economy is fostering uncertainty and undermining confidence, says Tim Adams, a former U.S. Treasury undersecretary who is managing director of the Lindsey Group, a Washington-based economic advisory firm.
“I’m somewhere between worried and scared,” said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., at a public debate on the economy held by the BBC at the IMF’s headquarters. “We do not have a common analysis of the problem” facing major economies, much less a vision for solving those troubles, he said. The U.S. can no longer “play the conductor” of the global economy, El-Erian said, and the G-20 remains ineffective – in fact, the group isn’t even holding its customary meeting on the eve of this weekend’s formal IMF-World Bank sessions. By default, it’s up to the IMF itself to provide leadership, he added.
The IMF’s new managing director, Christine Lagarde, sought to do just that in her opening appearance that effectively kicked off the annual meetings on Thursday. Lagarde said the economy had entered a “dangerous phase” of increased risks and little fiscal or monetary ammunition left to fight them. The situation demands a coordinated response: Effective containment of the debt crisis in Europe, short-term stimulus combined with medium-term deficit reduction in the U.S., and a faster shift by emerging market countries like China to boost consumers at home rather than relying on exports.
“Collective leadership is definitely needed,” said Lagarde. “It is not going to be a matter for one or two countries to lead the show. As I said, each and every country is engaged in that process and is at risk in the current situation, but can also participate in the solution.”
Nowhere is leadership needed more than in Europe. Olli Rehn, the European Commissioner for economic and monetary affairs, sought to provide reassurance that euro area countries would contain the bloc’s debt crisis but underscored the limits to speedy EU action. In an appearance at the Petersen Institute for International Economics, Rehn acknowledged the widespread concern in financial markets, shared by the U.S. Treasury secretary Timothy Geithner, that the €440 billion European Financial Stability Facility was too small to prevent contagion from Greece’s debt woes affecting countries like Italy and Spain. But he said any discussion of proposals to leverage the facility, such as by having it provide first-loss guarantees on sovereign debt, would have to wait until countries ratify the EFSF in coming weeks, beginning with a vote in the German Bundestag next week. He was similarly vague about ways to recapitalize European banks, a key goal of Lagarde’s, calling it “a work in progress.”
Unlike the American political system, which he likened to an aircraft carrier, the European Union is “a convoy of 27 ships. It is always much harder to turn this convoy in a single direction.”
Adams offered a darker metaphor, likening Europe’s debt crisis to “a slow car crash with no one at the wheel.”
