The global economy sees crisis after crisis. But where is the IMF's response?

Sweat almost dripped from the walls when the international financial summit met in October 2008 for the annual meetings of the International Monetary Fund (IMF) and the World Bank. The acute phase of what would later come to be called the ‘credit crisis’ was in full swing and the decisiveness was enormous. Everything to prevent blind panic from breaking out among savers, investors and bankers. The financial system faltered, and if nothing happened, so did the social order. The message from Washington: we are here no matter what. At last week’s annual meeting, fourteen years later, the crisis is also acute. The global economy is experiencing shock after shock after shock, says IMF director Kristalina Georgieva as he opens the meeting. That is by no means an exaggeration. There is the war in Ukraine, a food crisis in poorer countries, an energy crisis in Europe. There is a threat of rift between central banks and governments over the policies to be pursued to bring down high inflation worldwide. The financial markets are nervous and emerging and poor countries are in danger of getting into financial trouble. And the world is still reeling from the pandemic. The climate, the greatest crisis of all, is pushed far into the background by such acute problems. Yet many participants, both in the rooms where consultations are held and in the corridors where people go from meeting to meeting, are surprised this time about the lukewarm, indecisive atmosphere. “Calls for the coordination of the cooperative. Or co-ordinate coordination,” sneered the famous economist Larry Summers half a mile away at a meeting of the International Institute of Finance – the global club of banks. “This is the most comprehensive complex of challenges I’ve ever experienced. And if I’m honest: the fire brigade is still in the barracks.” It is significant that the G20, the club of the most important countries for the world economy to which the Netherlands temporarily also belongs, will not come to a joint communiqué this week. Russia, Saudi Arabia, China, the US: the ongoing geopolitical fragmentation threatens to turn this body into a divided and indecisive club. After the credit crisis, the G20 was upgraded to act quickly. There is one guideline this week: the fight against inflation must prevail. That is the message of the IMF. But there is also the threat of paralysis and disagreement. In most member countries there are also social calls for compensation for the rapidly rising energy prices. In many countries, this creates tensions between the government and the central bank. While the latter tries to slow down the economy with interest rate hikes in order to bring inflation down, governments are forced to heed the social call to maintain purchasing power, which is being eroded by high energy bills in particular. And that can actually boost the economy – or prevent the desired slowdown from taking place. Stagflation risk The tension between monetary and fiscal policy that this entails also applies to the Netherlands. Finance Minister Kaag calls it “balancing on the tightrope” in Washington. After previous energy support, the government is now also allocating money for setting a price ceiling, based on costs of 23.5 billion euros. But the uncertainties are great: the amount can be less, but also increase to more than 40 billion euros. In short, the IMF states that this type of support should be ‘targeted, temporary and covered’. In Washington, Kaag argues that countries such as the Netherlands, which have the financial scope for it, are allowed to do more by the IMF, but indeed, temporarily and in a targeted manner. The cabinet is still looking for financial cover for the extra energy expenditure, but Kaag also states that the entire energy issue and the additional costs will not be solved in 2023-2024. “We will face even hotter fires.” Ending energy support will be difficult. According to President Knot of De Nederlandsche Bank, energy experts are taking into account that the energy price may remain as high as it is now for five years. “And then the aid can degenerate into an open-ended scheme,” he warns – an expense with no end date attached. Also read: Europe is now losing its last authority at IMF According to Knot, the Dutch government derives “a lot of comfort” from the current low government debt of less than 50 percent of GDP, which suggests room to spend extra money. Knot recalls the 1970s, when inflation also spiraled out of control. “The Netherlands then had a government debt of only 40 percent of GDP, much lower than now. We also had a lot of open-ended government spending arrangements back then, and we saw how quickly the debt could explode.” The Netherlands then took a long time to regain the solid financial reputation it now has. But the requirement that aid must be ‘targeted, temporary and covered’ is not yet reflected in current policy by Knot. While you can: Alfred Kammer of the European office of the IMF says when asked that protecting the poorest 20 percent of the population, if done right, costs 0.4 percent of GDP. Protecting the poorest 40 percent takes 1 percent of GDP. But the average expenditure of European countries is already 1.8 percent, according to Kammer. And the Dutch a little higher. Germany even allocates 200 billion. food crisis The dilemma in a nutshell: prioritizing fighting inflation with rising interest rates and fiscal restraint is logical, and understandable. The same is true of supporting households and businesses. That is, in summary, the problem of stagflation – the simultaneous occurrence of economic stagnation and high inflation – in practice: there is only one arrow available for two targets that are far from each other. It also applies to the emerging and poorest countries, which are being hit by rising energy prices and food shortages as a result of the war. More than 365 million people have now been added, especially in Africa, who are at an acute risk of starvation. Decades of global poverty reduction have already been wiped out. Also read: British financial turmoil could just become an epidemic The Western monetary policy of sharp interest rate hikes and a dollar that has not been so strong in more than twenty years is causing more problems. Foreign debt is becoming unaffordable for poorer countries, and their declining currencies are making energy and food imports even more expensive than they already were. Several initiatives have already been launched from the IMF and the World Bank, including a rapidly deployable emergency fund to which $37 billion has already been committed. But even such an amount will be insufficient. More suffering and discontent threatens. A strong and joint initiative from Washington has not been forthcoming for the time being. “These countries’ debts need to be restructured,” says economist Summers. “But everyone looks at each other: the public sector, the private sector, China. And nothing happens. This week will be remembered as nothing but a missed opportunity.” Outside the fences with which the IMF and World Bank have been closed from the outside world this week, Reverend Susan Henry-Crowe will lead a small group in prayer on Friday. Some twenty years after the Jubilee movement, ultimately successfully, campaigned for a large-scale debt forgiveness of the world’s poorest countries, Jubilee USA is once again praying on the spot. It is symbolic of the paralysis within the IMF: the ideas apparently have to come from outside. Or from above. A version of this article also appeared in the newspaper of October 17, 2022