Author: Valentina Pasquali

Global Finance presents its annual International Monetary Fund/World Bank issue, in conjunction with the organizations’ annual meetings, taking place in Washington, D.C., in early October.


In the midst of widespread geopolitical instability and sluggish economic growth, government officials the world over will assemble in Washington D.C. in mid-October to discuss the way forward at the annual meetings of the International Monetary Fund (IMF) and World Bank (WB). If the 2013 gathering was characterized by cautious optimism and the sense that the world had begun to recover in earnest from the global financial crisis, new clouds hang over participants this year.

Mounting tensions from Ukraine to the Middle East risk undermining progress made not only in the regions affected but also, indirectly, around the world. The performances of the European Union and, to a lesser extent, the United States have been disappointing, especially with regards to employment. Emerging markets, with the exception perhaps of China, have been posting subpar rates of growth. Given this background, the unprecedented monetary policy, from Washington to London to Tokyo, that has been propping up the global economy in recent years may have run its course. The question now is whether fiscal policy is ready to pick up the slack. In the meantime, rumblings about Western dominance of the IMF and the World Bank continue in countries from India to Brazil, who are at work to shape their own vehicles of global economic governance.

“I do think that 2014 can be considered a watershed year in that it represents a departure from the downward trend which began with the fall of Lehman Brothers in 2008,” says Marcos Troyjo, director of the BRICLab at Columbia University. “But the atmosphere won’t be as optimistic as expected, since the pace of recovery around the world is much slower than what was foreseen only a couple months ago.”

Growth in the eurozone flat-lined in the second quarter of 2014, with Italy falling back into recession and even the German economy contracting, if only slightly. At +4.2%, the US posted an unexpectedly positive result in the second quarter, but paired with the dismal -2.1% in Q1, it points to an overall weak performance. But there is great concern about stubbornly high rates of unemployment (respectively at 11.5% and 6.2%, according to the latest data). Finally, the IMF recently lowered its growth forecast for emerging markets from a pre-crisis (2003‒2008) average of 7% to 5% over the next five years.

“Labor markets are still doing dreadfully in Europe,” says Guntram Wolff, director of Bruegel, a think tank in Brussels. As such, it is likely that this year’s annual meetings will see yet another rehash of the debate on austerity versus growth. “My view is that the discussion has been too narrowly focused,” says Wolff. “I would argue that we have an aggregate macroeconomic demand problem, especially an investment demand problem that can be addressed only by big core countries like Germany and France. But we also have a supply-side, structural reform problem.” According to Wolff, some institutions in Germany, like the Bundesbank, are coming see that the pace of growth in the region is not sufficient to effect a real recovery, which might open the door for more intervention. However, other branches of the German government disagree. “There is a strongly held view in Berlin, especially in the Finance Ministry, that Germany needs to reach a balanced budget and should start paying back its debt,” he says. As for the willingness to implement structural reforms in countries such as France and Italy, Wolff believes that the leadership is gradually moving in the correct direction, but it is not clear yet whether they have the necessary political support from voters.

Though things in the US appear to be looking up, policy uncertainty continues to represent a drag on growth. “We have a long-term problem but not a short-term problem,” says Gary Hufbauer of the Peterson Institute for International Economics in Washington D.C. “Short term, we are too fiscally constrained. But it is hard for fiscal hawks to understand that one can take different actions for the short and long term.”