By Mohamed El-Erian The opinions expressed are his own.
European officials must feel like that they were just on the receiving end of an “intervention” staged by their colleagues from other countries – a process whereby a group of people come together to “shock” a friend/family member into recognizing the depth of a personal crisis and the urgency of embarking on proper corrective actions.
The venue was this past weekend’s Annual Meetings of the IMF and World Bank. This event brings together policymakers from almost 190 countries, along with business leaders and media. It is full of formal meetings, seminars, press conferences, and bilateral discussions.
It is a well-attended gathering that serves many purposes. One of them is to enable policymakers to collectively get a feel for the state of a highly inter-connected and complex global economy. At times in the past, this has proved absolutely critical for designing policy responses that avoided terrible collective outcomes.
This was certainly the case in 2008. On that occasion, a series of consultations and discussions led policymakers from around the world to the startling conclusion that, after the disorderly collapse of Lehman Brothers, the global economy risked tipping into a great depression.
The follow-up was one of the most impressive examples of global policy coordination that culminated in the highly successful G-20 Summit in London in April 2009. The world averted an economic depression that would have spread unemployment, poverty and misery all over the world.
Unfortunately, it did not take long for such coordination to give way to competing and, at times, conflicting national agendas and narratives. This was particularly true in America and Europe where policymakers failed to understand and act on consequential global and national realignments.
Today the global economy is highly vulnerable to major dislocations on account of three distinct but mutually reinforcing problems: a sovereign debt crisis (whose epicenter is in Europe), banking system fragilities (Europe), and an inability to grow robustly (America and Europe).
As Europe features in all three, it should come as no surprise that European officials were approached by lots of people this weekend in Washington. Many wanted to understand what the European policymakers had in mind; and they wished to ring a very loud alarm that would spur these officials into bold and decisive action.
Wherever they turned, European officials heard a consistent message which typically consisted of four specific points:
• The bickering and dithering of European politicians and policymakers have allowed the crisis that originated in Greece to spread too far and wide;
• The crisis is has now gotten close — far too close — to being uncontrollable;
• Virtually no country in the world would be immune from the adverse consequences; and, therefore,
• Europe needs to finally step up with decisive policies that are underpinned by a common political vision of what the Eurozone should look like in five years time.
Initially, the reactions of most Europeans ran the gambit: from denying the severity of the crisis to diverting the blame elsewhere. Some hit back, noting that they were neither blind nor deaf. By the end of the meeting, however, most seem to have heard the messages, taken them to heart, and indicated their intention to act on them.
Recognition and proper diagnosis are essential components of a durable solution to a problem. It is therefore good news for the global economy that, especially after this weekend, there is little doubt in the mind of Europeans about the urgency of their situation. They also know that the world is watching and hoping.
It is also good news that some key officials even went so far as to identify a timetable for action – the six-week run-up to the next G-20 meeting in France. True, it is a timetable that is excessively influenced by political considerations rather than economic and financial ones. As such, it may be challenged by markets that are unsettled by fragilities in both sovereign debt and banking systems.
So, will this Washington intervention and timetable hold? The answer depends on five key issues:
First, the Europeans must take immediate — and I stress immediate — actions to stabilize the banking system and counter more effectively the persistent recent rise in yields on government debt issued by Italy and Spain in particular. This cannot wait six weeks.
Second, they must quickly come up with operational mechanisms that build secure firewalls around at least one highly troubled country (Greece) so that it can default without triggering a tsunami for others in the Eurozone.
This will only be possible if, and this is the third point, the European Central Bank (which has been carrying most of the burden so far) receives much more support from national fiscal and regulatory authorities.
Fourth, bold structural decisions must be taken to strengthen the architecture and functioning of what, in the final analysis, is likely to be a smaller, less imperfect and stronger Eurozone.
Finally, politicians must secure the airspace for the technocrats that are waging difficult day-to-day battles through better communication, a common vision and a unified purpose.
This is quite a list, and there is very little time to waste.