The International Monetary Fund wrapped up its annual meetings this weekend. They came at a critical moment, as the world's most advanced economies are slipping toward recession and as the Eurozone appears to be careening toward default and even possible dissolution. In the midst of the turmoil, most of the world's finance ministers and many of its central bankers assembled in Washington for their annual review of IMF and World Bank policies.
There was plenty of housekeeping on the agenda, but the world's economic plight was the first order of business. Welcoming the assembled ministers, IMF managing director Christine Lagarde said that the the world was at a "moment of choice." Rhetorically, at least, the leaders responded. Speeches and communiques were chock full of language about a committment to bold, decisive, and coordinated action. But behind the brave rhetoric lay continued division and confusion. With ministers and bankers now on their way home, what insight can be gleaned from the meetings?
1. Everyone is scared: Almost nobody at the annual meetings tried to downplay the seriousness of the current crisis. Observers familiar with IMF meetings saw this year's iteration as the grimmest they could recall. Indeed, Lagarde cited the consensus on the severity of the crisis as progress of a sort. "There was no denial," Lagarde reported after meeting with the assembled ministers.
2. Nobody has a plan: The official communique produced by the assembled finance ministers was dressed up as a roadmap out of the crisis. But the resemblance between the communique and an action plan was faint. The language was vague, nonbinding, and aspirational. The section on the Eurozone was typical:
Euro-area countries will do whatever is necessary to resolve the euro-area sovereign debt crisis and ensure the financial stability of the euro area as a whole and its member states. This includes implementing the euro-area Leaders’ decision of July 21 to increase the flexibility of the European Financial Stability Facility, maximizing its impact, and improve euro-area crisis management and governance.
The communique sidesteps entirely the question of what precisely is necessary to safeguard the Euro area. On that critical question, sharp division remains between European leaders. At the meetings, senior German officials reiterated their concern about large new bailouts. "We won't come to grips with economies deleveraging by having governments and central banks throwing – literally – even more money at the problem," said finance minister Wolfgang Schauble.
With Europe divided, there was no plan for the rest of the world to get behind. While attempting to maintain an image of progress, senior IMF officials effectively acknowledged that the talks produced little in the way of concrete measures. "The solutions are not yet in focus, but they are coming into focus," said David Lipton, the Fund's new first deputy managing director.
3. China won't save the Eurozone: On the eve of the meetings, there had been considerable discussion about whether major emerging markets -- and China, in particular -- might invest heavily in Europe in a bid to bolster the Euro. The meetings ended without much optimism that the BRICs would ride to the Euro's rescue. The director of China's sovereign wealth fund, Gao Xiqing, provided what may be the weekend's key quote. Asked whether China would consider investing heavily in European debt, he said this: “[A]s a corporation our mandate from the government is to maintain certain amount of profitability. We can’t just go save someone. We’re not saviors. We have to save ourselves.”
4. The United States is fed up with European indecision: The meetings were notable for the continued tough language by senior Americans toward European leaders. Treasury Secretary Tim Geithner doubled down on his criticism of Europe and did not appear at all chastened by European annoyance at his recent interventions. He warned that Europe's debt crisis threatened “cascading default, bank runs and catastrophic risk.” The American frustration was also evident in statements by former Obama administration officials circulating around the meetings. Austan Goolsbee argued that Europe has been long on talk and short on action:
In Europe, they've kind of turned this into a bad Monty Python skit, where, you know, the guy comes out and says, 'We need to act,' and the next one says, 'You're right, let's draft -- no more talking..., 'I second the motion. Let's start doing something. I mean, they're not actually doing anything. They just keep agreeing that they're going to work in concert.
For his part, Larry Summers warned that Europe's probems go much deeper than Greece. "If a generous sovereign from Mars came down and paid off every penny of Greece's debt tomorrow," he insisted, "the fundamentals of the European crisis would not be altered."
5. Christine Lagarde may have to get specific: To this point, Lagarde has confined herself, at least publicly, to the combined role of goad and cheerleader. She repeatedly warns political leaders of the need for concerted action while also doing her best to avoid stoking panic in the financial markets. Her speechwriters have deployed all sorts of adjectives to describe how world policymakers must act ("bold," "decisive," "agile"). At a press conference on Saturday, Lagarde was in good form. She demanded that financial leaders -- particularly in Europe -- implement what they agreed (specifically, the July bolstering of the European Financial Stability Facility). She also tried to boost the financial world's spirits, reminding the audience of how much has been accomplished in terms of effective regulation and reform since the 2008 meltdown. But nowhere in her many remarks over the weekend did Lagarde lay out a specific plan for member states to adopt.
Behind the scenes, Lagarde is no doubt talking in much greater detail about the specific steps countries must take. At some point, she may need to assemble a detailed plan and make the case for it in public -- in effect shaming political leaders into action. It's not a step she would take lightly. For all the prominence of her position, she has little real leverage over states that aren't borrowing IMF funds. There's a significant chance that leaders would ignore a Lagarde Plan, reducing her leverage even further. But perilous times may soon call for perilous strategies.