By Simon Johnson
The finance ministers and central bank governors of the world gathered this weekend in Washington for the annual meeting of countries that are shareholders in the International Monetary Fund. As financial turmoil continues unabated around the world and with the IMF’s newly lowered growth forecasts to concentrate the mind, perhaps this is a good time for the Fund – or someone – to save the world.
There are three problems with this way of thinking. The world does not really need saving, at least in a short-term macroeconomic sense. If the problems do escalate, the IMF does not have enough money to make a difference. And the big dangers are primarily European — the European Union and key eurozone members have to work out some difficult political issues and their delays are hurting the global economy. But, as this weekend’s discussions illustrate, there is very little that anyone can do to push them in the right direction.
The world’s economy is slowing down, without a doubt. The latest quantification was provided Tuesday of last week in the IMF’s World Economic Outlook, which is perhaps the most comprehensive forecast of global growth and its main components (see Table 1.1). (Disclosure: I helped produce and present this view was I was chief economist at the IMF, but I left that position in summer 2008.)
The IMF has reduced its forecasts for both 2011 and 2012, but the latter is a more notable change (we can already see the gloomy 2011 picture all around us). Compared with its view in June, the IMF expects global growth in 2012 to be 0.5 percentage points lower (than previously expected). Part of the pessimism is for the United States – total GDP growth in 2012 is only expected to be 1.8 percent; anemic at best. (Remember that our population typically grows at just under 1 percent per annum, so this level of growth would barely put a dent in unemployment.)
But the really stark message is for Europe. According to the IMF, the eurozone as a whole will expand at only 1.1 percent in 2012 and hopes that troubled countries will grow out their debts seem increasingly like a stretch. Just to take one example, Italy’s forecast for 2012 has been marked down to just 0.3 percent – and even in the best case scenario, credit availability there seems likely to get tighter over the coming months, which may further slow growth.
A potential recession in the eurozone and a weak recovery in the United States does not make for a world crisis. Beware people who demand that the world be saved – usually they are making the case for a bailout of some kind.
Don’t get me wrong — a serious crisis could still develop. There are plenty of warning signs regarding the situation in Greece and its potentially broader impact. According to the IMF’s Fiscal Monitor, also released last week (see p.79) Greece’s general gross government debt is now forecast to rise to nearly 190 percent of GDP in 2012, before falling back towards 160 percent by the end of 2016. At this point, Greece needs a global growth miracle – and there is no sign of this on the horizon.
If Greece pays less on its debt than currently expected, this will push down the market value of other sovereign debts in Europe. As The Economist argued recently, the government debt of some large eurozone countries has unambiguously moved from the category of “risk-free” to “risky” in the minds of investors.
The numbers involved are big. Italy, for example, had public debt over 1.84 trillion euros at the end of 2010 (using the latest available Eurostat data, “general government gross debt,” annual series). The GDP of Germany is around 2.5 trillion euros and there is no way that German taxpayers would be comfortable in any way guaranteeing a substantial part of Italy’s debt. The entire eurozone has a GDP of around 9.5 trillion euros but no one is volunteering to take on debt issued by someone else’s government (again, I use end of 2010 data from Eurostat).
To put the scale further in perspective, compare them with the IMF’s ability to lend to countries in trouble. The technical term is the fund’s “one year forward commitment capacity” which for “Q3 to date” is 246.0 billion SDRs (September 15 update; SDRs are “Special Drawing Rights”, which exist only at the IMF.) On September 20, 1 SDR was worth 1.57154 US dollars, so the IMF could lend no more than 386 billion dollars — as one euro is worth about 1.37 US dollars this week, this is about 280 billion euros.
Or you could think of it as 15 percent of Italy’s outstanding debt. This is not the only way – and not a precise way – to think about what the IMF could bring to the table, financially speaking. But it makes the right point; the European issue is way above the IMF’s pay grade.
Germany, France, Italy and their colleagues need to sort out how to bring the situation under control – to decide who will definitely pay all their debts and who needs some kind of restructuring. About a quarter of the world’s economy therefore remains in limbo, beset by repeated waves of uncertainty. And financial market fear can spread to other places, including the United States.
Complaints may be heard this weekend, but there is no one at the IMF meetings who can persuade the key European players to move faster in their decision-making. The politicians will take their own time – prodded periodically, no doubt, by the financial markets.
Do not expect a fast resolution or, therefore, a quick turnaround in the global economy.
An earlier version of this column appeared on the NYT.com Economix blog; it is used here with permission. If you would like to reproduce the entire post, please contact the New York Times.