BlogSpot - October 18th, 2013
IMF and World Bank Annual Meetings
The Annual Meeting of the IMF and the World Bank focused on Europe’s current economic and financial situation, challenges ahead in developing economies and the US fiscal crisis.
In a Press Conference on Europe, the IMF outlined key challenges. The global economic narrative has shifted from a three-speed recovery to a more complex pattern of recovery—marked by a sharp slowdown from emerging markets. More specifically on Europe:
While financial stress has declined, unemployment and stressed balance sheets remain major obstacles for growth—though all but two eurozone countries (Slovenia and Cyprus) are projected to reach positive growth in 2014. Satyajit Das, in a EconoMonitor entry, provides a more negative view of eurozone prospects, suggesting that there is a high probability of a relapse into crisis mode as the roots of the crisis have not yet been addressed, but buffers are exhausted. Inflation remains low at 1.1 percent at eurozone level, with negative inflation in some Southern countries.
Regional rebalancing has ways to go. The IMF notes that regional financial fragmentation is particularly harmful to recoveries in Southern economies, which depends on those SMEs that have difficulties accessing credit. Matthew Dalton (WSJ RealTime Brussels blog) quotes a new paper by economists at the European Commission that point at the lack of strong economic rebalancing in the monetary zone, reflected in diverging employment performances.
The IMF presented a fourfold policy recommendation: (i) the cleaning-up of balance sheets (implying, for banks, a credible asset quality review, in the presence of a solid backstop), (ii) the acceleration and completion of European economic and monetary union, (iii) demand support, and (iv) structural reforms.
For Susan Schandler, the European crisis will bear negative effects on the IMF’s credibility in crisis management due to the Fund’s deviation from its loan granting principles. In VoxEU, she underlines that the IMF disregarded key principles when extending loans, mainly the “rigorous and systematic analysis [indicating] that there is a high probability that the country’s public debt is sustainable in the medium term.” The consequence was disregard for the potential need for increased financing and debt restructuring, leading to a persistent debt overhang. She also argues that the need to engage into programs with high probability of success was lessened. She recommends restoring principles for IMF lending and defining procedures for programs when debt sustainability is low.
The IMF’s Fiscal Monitor (Taxing Times) recommended (see Michael Keen) “a better way to tax”, namely expanding the tax base before increasing rates via the reduction of tax exemptions and placing a stronger burden on consumption rather than labor. While developed economies have already applied the latter, they have also increased social contributions and made little effort to broaden the tax base. A further option to increase public revenue is using fiscal policy to eliminate distortions, especially in the environmental area. Yet what gathered the most attention was the recommendation to increase contributions of wealthy taxpayers. For Ryan Bourne, these recommendations, and particularly the latter, are populist “punitive tax measures” as wealth taxes are inefficient.
In the field of development cooperation and fight against poverty, Donna Barne reports in the World Bank’s blog the approval by the Development Committee of the World Bank Group’s new strategy to eradicate extreme poverty by 2030. It encompasses stronger integration of the group’s working units, increased efficiency and stronger investment in knowledge and information technology. Special attention was paid this year to the issue of gender, with both the IMF and the World Bank noting there has been little progress to increase women’s participation in the labour force.
Overall, Mohamed El-Erian deplores in FT Alphaville the lack of adequate multilateral responses during the Annual Meetings—much needed as the existing financial system induces worldwide spillovers effects. He stresses that central banks have limited means to counter the lack of necessary reforms by policymakers, which combined with a difficult economic context forces them to continued, and disruptive, market intervention.
The European Central Bank and Eurozone Architecture
In the discussion of the various “Unions” for Europe, a special place is given to the ECB.
First, on banking sector clean-up, Jacob Funk Kirkegaard, in a Peterson Institute Issues Watch, gives a positive assessment of the ECB’s strategy to shape needed structural reforms of the Eurozone financial sector in the wake of assuming the role of a zone-wide banking regulator through the Single Supervisory Mechanism. He dismisses concerns about indulgence—possibly justified because of concerns about market reactions—in the forthcoming asset quality review not only because the ECB seeks to maintain its reputation, but also because eventual balance sheet gaps are manageable by the private sector and insolvent institutions should be consolidated or absorbed, with renewed ECB intervention in the financial sector in a worst case scenario.
Silvia Merler and Zsolt Darvas argue, in Bruegel, that the ECB should not add to its mandate co-decision of numerous elements of financial assistance programmes: (i) because of risks of political pressures; (ii) because of risks of conflicting objectives (e.g., a potential dilemma between the need for the Outright Monetary Transactions program for monetary policy purposes, yet a situation that does not match the program’s conditionality).
In a CEPS paper (‘Proposal for a Stabilisation Fund for the EMU’), Bernard Delbecque proposes a Eurozone-wide insurance system managed by the European Commission and the European Stability Mechanism to dampen macroeconomic shocks, with member states contributions when their growth exceeds regional real GDP long-term growth estimates. His proposal avoids any fiscal sovereignty transfer but rests on the difficulty of assessing potential output.
The Short View... The Nobel Prize is split three ways.
As reported by FreeExchange, the Prize was awarded to the American economists Eugene Fama, Lars Peter Hansen and Robert Shiller, for their work on the “empirical analysis of asset prices”. The Economist provides a reading list of their work.
