Regular participants in these annual gatherings could not resist observing that the general mood was terrible and, according to some, was even worse than at the 2008 annual meetings that were held weeks after the Lehman Brothers went bankrupt in the US, triggering a wider credit crunch in the world's largest economy and financial turmoil elsewhere in the world.
Undoubtedly, world economic growth is slowing down. The IMF has lowered its growth projection for the world economy by 0.5 percentage points. According to the major lender, global output growth will reach 1.8 percent in 2012, whereas the economic expansion in the 17-member eurozone area will only be at 1.1 percent next year. This time, the eurozone is the epicenter of the crisis. The European Union and key eurozone members have some difficult political issues to work through, but delays in the decision-making process are hurting the global economy badly. There is, however, very little others can do to push them in the right direction.
As Europeans have rejected such strategies as eurobonds and fiscal unions, we now have a plan on the table by the IMF and the US to increase the size of the EU rescue fund, the European Financial Stability Facility (EFSF), from 440 billion euros to 2 trillion euros, according to British daily The Telegraph. However, the German bloc is not happy about this increase because Greece and Italy have no collateral to offer. Discussions such as these explain why little progress is being achieved, while delays serve to increase both the size of the bailouts and public fears. They key questions are over who will save Greece and how.
There is another important stabilization move necessary in this plan: the recapitalization of European banks. However, as Germans block the first aspect of the plan, the French government is blocking the proposed recapitalization. French banks are the most vulnerable ones and their credit ratings were recently downgraded. The outlook on their ratings is negative, signaling that similar downgrades are likely to come in the not-so-distant future.
The IMF, on the other side of the Atlantic, does not have sufficient funds to enact a plan in case of economic emergency, either. IMF Managing Director Christine Lagarde is working to raise the funding available for economies like Italy's when it becomes necessary. Eventually, if any bailout is required, the money will come jointly from Europe and the IMF.
The heart of the problem is the currency mismatch. Eurozone countries will have to correct this misalignment one way or another. This is a very tough issue to handle, and it is going to be painful for debt holders and surplus economies like Germany's.
I would like to quote a couple of leaders' speeches made during the annual meetings to demonstrate what kind of comedy we are playing at here. The governor of the Bank of France said in a Bloomberg interview that he is “extremely confident” in French banks because “we know them very well. We know their balance sheets, their risk assessments. We know they have no toxic assets.” He added that there is no reason to activate the support system that was set up during the financial crisis in 2008 to now assist French banks. The markets “are over-reacting,” he said, adding, “They need to come back to a sense of reality.”
Greek Finance Minister Evangelos Venizelos sought to reassure nervous markets and his EU partners on Saturday by pledging that his debt-ridden country will do whatever it takes to avoid default and stay in the eurozone. He declared: “Greece will always be in the euro and Greece will never go bankrupt because this would be destructive for the eurozone and for many other countries beyond the eurozone. … Greece is determined to honor all its obligations. No Greek paper will ever go uncovered.”
A bright spot
On the brighter side, Turkey has successfully divorced itself from this mess in Europe thanks to its sound fiscal stance and proactive monetary policy that predicted the turmoil in a quite timely fashion. Central Bank of Turkey Governor Erdem Başçı was the star of the annual meetings, and Turkey was referred to as the economic bright spot in the world and in Europe. Many experts rushed to his presentations to hear positive words and a sound analysis of the crisis. Turkey's economic growth has been remarkable so far, with devaluation and self-correction mechanisms regarding the current account deficit working smoothly. The long-term positive effects of this restructuring will outpace the short-term consequences of the global economic hiccup. From the perspective of many observers, including myself, Turkey is in good hands.
