The recent meetings of the International Monetary Fund were held against the backdrop of continued tumult among economies and markets around the world. They again validated two basic truths. First, political leaders should not raise expectations about a cohesive plan in a volatile environment, and then demonstrate neither cohesiveness nor a plan. Expectations are best calibrated to be overachieved, not dashed. Second, the dynamic of putting a thousand nervous bankers together after a depressing week in financial markets, bombarded by downbeat views of what may happen next, does not yield group optimism.
Reflecting the worrisome economic tone, the IMF has marked down its outlook for global growth in 2011 and 2012, and marked up its risk weighting for this weaker outlook. Notably – absent an uncontained Greek default – the “most likely” forecast for the industrial countries is a period of long, slow and volatile growth … a “sloggy” recovery. But the weaker outlook is a developed-country phenomenon, as the dynamic emerging economies are expected to remain dynamic. A two-speed world is becoming entrenched as part of the new global normal.
Meanwhile, with a debt-to-GDP ratio of 150 per cent, and an emerging combination of weak growth and austerity slippage, the Greek fiscal numbers just don’t add up. While bankers talked privately about the need for discounts of as much as 70 per cent, European leaders still cling grimly to their ability to avoid a Greek default. The problem, as one commentator at the Washington meetings put it so succinctly, is that “Greece is illiquid, insolvent and uncompetitive, and there is no credible plan for Greece.”
The proposition that the United States may be heading for a Japanese-style “lost decade” generated a lot of non-conclusive but animated discussions. Proponents of this view point to the “balance sheet” nature of the U.S. recession, and the need to work out of a large stock of housing that Americans cannot afford, and to deleverage an overleveraged financial-services sector and household sector. But opponents of this view stress that the U.S. is not Japan, particularly in the incredible flexibility and innovation of its private sector. Where views converged is the worry that lack of leadership, the absence of a credible fiscal plan and the risk of policies that frustrate private-sector flexibility could so dampen confidence that the natural resiliency of private-sector investment and entrepreneurship would be constrained and the long, slow and sloggy recovery become longer, slower and sloggier.
To put this in context, we are moving from a financial crisis to an economic crisis to today’s fiscal crisis. The great risk is that this could become a crisis of competency and confidence in leadership. European leadership is in denial on the seriousness of their fiscal problem and the timeline for addressing it; American leadership is in denial that their fiscal problem needs to be addressed before the next election or that compromise is needed in how to address it.
In the face of a crisis, political leaders are expected to lead, and a common refrain around Washington was a palpable absence of leadership. The public and markets are desperately seeking a credible plan. Simply put, European leaders need to build a ring fence around their banking system to prevent contagion in the event of a Greek default; the U.S. must revisit the realistic and pragmatic fiscal proposals in the National Commission on Fiscal Responsibility and Reform; and the G20 has to demonstrate that despite differing national circumstances, it can act for the common global good.
Kevin Lynch is vice-chair of BMO Financial Group.