Tough talk

At the spring meeting of the IMF (International Monetary Fund) and the World Bank, the 500-billion-euro rescue package for Greece was the main and most controversial item on the agenda. Many European countries hesitated to agree to loan guarantees for the heavily indebted nation. In the end, Germany alone ended up contributing 148 billion euros to the package, which is supported by the IMF.

"The effort to be made by the Greeks is huge," IFM director Dominique Strauss-Kahn said at the time. "They have to understand that we don't try to punish them for some kind of sin but rather that we want to help them get back on track. And this will be very difficult, very long and very painful."

Switched to a different tune

Tough talk from the IMF is nothing new. Since 1982, when the organisation ordered Mexico to implement reforms in return for loans, the IMF has been known for its key three demands: liberalisation, deregulation and privatisation. But lately the IMF has switched to a different tune: more credit, more flexibility and fewer conditions.

While both the IMF and the EU have praised Greece for its reform efforts, investors remain wary of countries whose finances are shaky. In its latest report on the stability of the global financial system, the IMF is only cautiously optimistic, saying "significant risks" remain.

"The financial system remains the achilles heal of the economic recovery," said Jose Vinals, head of capital markets at the IMF.

Vinals points out that investors still see bonds issued by countries such as Greece, Ireland, Portugal and Spain as far riskier than those of Germany, whose bonds serve as the benchmark in Europe.

Sensitive to surprises

"The bad news, however, is that despite this progress, confidence is not yet fully back," Vinals said. "This explains why financial markets remain sensitive to surprises and can quickly shift back to crisis mode."

Adding to Europe's woes is the strong euro, which hurts exports - to China for example. The US has for years tried to pressure China to let its tightly controlled currency rise against the dollar, and now Europe is chiming in, claiming together with the US, that the yuan is undervalued.

The EU is China's biggest trading partner, but Rolf Langhammer from the Kiel Economic Institute says that, given the uncertain state of the world economy, it's naïve to think China will accommodate US and European demands.

"There's a third party to consider - one that China can't pin down - and that's the euro. As long as the euro moves up and down against the dollar, the Chinese central bank will be wary of the uncertainty surrounding the euro-dollar exchange rate."

Another issue likely to trigger heated debates are the planned reforms within the IMF and the World Bank, as blossoming emerging economies demand a greater say. But the major industrial nations, especially in Europe, are reluctant to concede power, according to World Bank President Robert Zoellick.

"I think the biggest change over the past 20 years that we've seen in the economic area is the rise of the emerging economies and the larger developing economies, the Chinas, the Indias, the Brazils, the Indonesias," Zoellick said. "In this financial crisis, it's striking that they were not the cause this time as they've been in the past and, indeed, have been part of the source of growth."

So, with currency spats, a shaky economic recovery and a reorganisation of the IMF and the World Bank on the agenda, finance ministers and central bankers will struggle to speak with one voice, as each region or country strives to protect its own interests in hard times.

Author: Nicole Goebel
Editor: John Blau