The International Monetary Fund (IMF) meetings in Washington concluded with warnings about the fragility of the global recovery and the need for increased economic coordination over nationalism. The agency singled out the UK vote over whether to leave the European Union (EU) referred to as “Brexit,” for British exit from the EU, as a particularly large near-term threat. The vote is scheduled for June 23.
The IMF also warned of the need for more fiscal stimulus and reform, given the limits of monetary stimulus. The concern is that monetary stimulus has run its course, while the refugee crisis in Europe has triggered even more nationalism. No one wants to be told what to do, nor apparently do what needs to be done, to boost growth at this point in time.
The IMF also attempted to get member states to agree to avoid currency wars as a means to stimulate their economies. Japan pushed back, arguing that its currency is already too strong, which is true; the larger issue is that Japan has yet to launch major reforms to pull its economy from the stagnation of the past three decades.
One could argue that the IMF is making matters worse, instead of better, on the geopolitical front. Much of the backlash we are seeing to globalization both at home and abroad is being driven by lagging economic performance and a sense of loss of control; telling countries how to fix what they have done wrong from the ivory tower of the IMF only further infuriates populists and fuels their desire for “independence” from the rest of the world.
The blogosphere regarding IMF Managing Director Christine Lagarde’s comments on a potential “Brexit” would make some fans of Donald Trump blush with how vile and personal they are. A large number of Brits view European Union laws and regulations as attacks on their sovereignty. The result is more talk of nationalism, isolationism and outright racism. The backlash toward immigrants in the UK is ugly. A vote to exit the EU would also be a vote to close the door to immigrants traveling on EU passports. This is despite the fact that the UK has been the poster child for “good”‘as opposed to “bad” immigration; migrants to the UK have been more educated compared to those in other EU countries; they have boosted productivity and economic growth in recent years.
The IMF voiced support for negative interest rates, despite the questionable effect, which further undermined its credibility. The European Central Bank ( ECB) is slated to meet this week and retain a dovish tone; the fact that the ECB will likely leave off a move farther into negative territory on rates is no coincidence.
Worse yet, while in town for the IMF meetings, the Chinese Finance Minister acknowledged the Federal Reserve and Fed Chair Janet Yellen for their attention to China’s economic performance. I can’t think of a worse endorsement for the Fed at a time when Congress is already on the warpath to clip its wings.
Separately, the Doha round of oil negotiations failed to deliver cuts to oil production. Markets shouldn’t be surprised, given the cheating already occurring within OPEC. Why would non-OPEC countries sign onto cuts? Oil prices nonetheless tumbled in both Asia and Europe overnight and look poised to fall further in the U.S. This will provide Yellen with more reason to delay rate hikes in April and now potentially even in June.
Bottom Line: We desperately need an international framework to encourage countries to make the tough decisions on structural reforms and ease up a bit on fiscal policy. Those decisions need a framework of credibility and latitude, however, for countries to act on their own. The IMF’s fear tactics aren’t working and are instead pushing us further apart, instead of together, at this critical juncture.