Tags: Band-Aids | Global | Economy | threats

Band-Aids Don't End Risk to Global Economy

Friday, 13 February 2015 07:07 AM EST

This week, three sets of meetings sought to defuse three distinct threats to the global economy.

All of the gatherings featured suspenseful atmospheres, dramatic posturing and some public tantrums. And their outcomes were similar, too: The participants ended up just buying time, without doing much, if anything, to begin to address the underlying causes of the unfolding crises.

In the first instance, President Francois Hollande of France and Chancellor Angela Merkel of Germany traveled to Minsk on Wednesday to compel the Russian and Ukrainian presidents to stem the escalating violence in eastern Ukraine that has claimed about 5,000 lives.

After a tough all-night negotiation session, they agreed Thursday to a cease-fire to take effect this weekend.

Earlier Wednesday, the finance ministers of the euro zone countries gathered in Brussels to try to find common ground on Greece. After seven hours of discussions, they weren't even able to settle on a road map for future negotiations.

But with both their finance ministers playing tough and signaling seemingly unbridgeable negotiating positions, Merkel and the newly elected prime minister of Greece, Alexis Tsipras, were subsequently able to show leadership and be “presidential.”

On Thursday, both declared themselves willing to compromise, providing much needed political cover for the finance ministers’ negotiations that are set to resume Monday (preceded by technical preparations starting Friday).

Earlier in the week, some of those ministers had joined their central bank colleagues in Istanbul for a meeting of the Group of 20.

The agenda included policy actions to strengthen a global economy that, with the exception of the U.S., has been losing steam. In their communiques, they reaffirmed prior commitments and renewed their encouragement of central banks to continue pursuing  unconventional monetary policies.

Yes, some progress was made in all three meetings, but they mainly just kicked the can down the road. At best, they were holding operations that risk resulting in failure if they aren't quickly supplemented by more comprehensive agreements.

There is widespread skepticism the Ukrainian cease-fire can hold. The agreement is very similar to an earlier deal, also negotiated in Minsk, that  fell apart. There is still very little trust between the opposing parties, both among the political leaders and combatants.  And there are still no credible verification and enforcement mechanisms.

Without more meaningful efforts, the cease-fire will quickly come under pressure and risk collapse.

Meanwhile, the Ukrainian and Russian economies will continue to implode.

As for Greece, the emerging compromise concerns only its immediate financing needs.

The parties remain very far apart when it comes to how, why and when the new government would recast austerity, deepen structural reforms and secure additional debt relief.

The G-20 meeting was similarly uninspiring. It not only failed to come up with any substantive policies, it also ended up endorsing an approach that relies too heavily on central bank measures, thereby encouraging countries to seek to devalue their currency and raising the risks of a slide into an accidental currency war.

Unless bold political leadership emerges that fosters the conditions for sensible compromises on comprehensive solutions, it is only a matter of time before this week’s three modest achievements give way to greater instability and tensions that would further undermine the global economy.

The international community may have succeeded in pressing three pause buttons under tough negotiating conditions. But what the world really needs is to fast forward to happier endings.

To contact the author on this story: Mohamed El-Erian at [email protected]

© Copyright 2024 Bloomberg News. All rights reserved.

This week, three sets of meetings sought to defuse three distinct threats to the global economy. All of the gatherings featured suspenseful atmospheres, dramatic posturing and some public tantrums.
Band-Aids, Global, Economy, threats
Friday, 13 February 2015 07:07 AM
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