Bank-Fund Meetings: It’s Mainly Fiscal

The Annual Meetings of the World Bank and IMF this week look far different than expected a few weeks ago.  Here are five thoughts on what to look for.

1.    The dominant issue will be the U.S. fiscal mess as the central global risk and the primary driver of financial markets. Outside the United States, there is little understanding why we are engaged in such a destructive debate with so much at stake. Uncertainty about what comes next will hang over virtually all policy discussions.

2.    U.S. policy makers will be sidelined, both because the crisis will force them to take a low profile in the official meetings, and because the government shutdown will restrict their public appearances outside of the IMF meetings. (The conferences hosted by private financial institutions on the margins of the meetings are as important as the official meetings for getting a message out).  The lesson that our fiscal crisis undermines our ability to project our values and policies abroad will be on vivid display this weekend.

3.    The IMF economic outlook, released yesterday, stresses the risks associated with low export growth and the Fed’s exit from unorthodox policies.  Emerging markets in particular will complain about sudden stops in capital flows due to expectations of Fed tapering (they also complained about hot money inflows when industrial country central banks were launching these policies).  But while there will be sympathetic calls for close coordination of policy, emerging market policymakers will come away empty-handed. Central bankers see their policies as supportive for growth and appropriate on domestic grounds.  The message back to countries will be to move more aggressively to fix their own imbalances and let their exchange rates adjust as needed.

4.    I recently examined the case for a strengthening of the global liquidity arrangements through an expanded network of swaps.  I don’t expect any new deliverables this weekend, but there should be discussions about whether the Fund can and should do more to protect countries from volatile capital flows.

5.    Europe will get a pass. There is little confidence outside European capitals that their policies can restore growth, produce sustainable debt levels in the periphery, or reduce punishingly high unemployment rates.  In calmer times, there would be a vigorous debate over whether Europe is on the right track.  Not this week.