World Bank gives its Two Cents

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Robert Zoellick, the head of the World Bank said Sunday that the path that key market players are taking indicates that the global economy will go down a very challenging and dangerous road.

DANGER ZONE

In a conference held in Sydney, Australia, Zoellick spoke to members of the Asian Society, expressing his concern over the worlds economy entering a new danger zone.

The World Bank offers “financial and technical assistance to developing countries.” Zoellick has been the World Bank chief since 2007.

The world-wide the situation seems to be weakening on a day to day basis. The events in Europe and U.S. over the past few could signal even bigger problems ahead. “There was a convergence of some events in Europe and the United States that has led many market participants to lose confidence in the economic leadership of some of the key countries,” Zoellick said.

Several European nations continue to struggle with high debt, slow economies and other issues and the U.S. politicians are trying to handle a debt crisis rather weakly. Although they raised its debt ceiling, credit agencies have downgraded its credit rating, and stock markets have weakened.

WARNING

Zoellick, a former U.S. Trade Representative in the administration of President George W. Bush said that organizations need “to get ahead of” their debt problems. Instead of quick, short term fixes, they need to be thinking on a long-term scale.

To Australia’s ABC News he added that a long-term solution “requires attention to some of the fundamentals. It will not suffice to track government debt but methods need to be implemented to bolster the economy and spur growth.

EUROPE

“Unless the economic leadership gets ahead of the problem in its different dimensions, you’ll see the lack of confidence, he continued. He cautioned nations to weather their economic storm, otherwise, countries like Spain and Italy could find themselves in very difficult positions. Methods such as endorsing moves by the European Central Bank to buy bonds from distressed euro-zone nations such as the mentioned countries, will solve only near-term liquidity issues. Instead, the head urged leaders to apply structural overhauls that would boost productivity, job creation and free trade.

CHINA

Mr. Zoellick went on to identify the risk of overheating in China. the country’s 6.5% inflation number for July indicates a third year of such high figures. This may have influenced policy makers to allow the yuan to appreciate to combat price pressures, and he called for further appreciation.”The reason I think you have seen some of this appreciation of the currency is that I think that [July inflation] probably tipped the balance internally that currency appreciation is a way to counter inflation,” he said.

The inflation rate in China of up to 10% would pose major problems for the country’s leadership. In the case of a major slowdown he believes that Beijing may have less policy stimulus available than before as a result of likely bad loans in the financial system and the fast paced inflation.

THE DOLLAR

When speaking of the role of the U.S. dollar as a reserve currency, Mr. Zoellick said he expects it to stay as a primary reserve asset, but he called for a multilateral approach which will see other currencies including the yuan grow as a proportion of global reserve holdings in time. In his opinion markets were unafraid that the world’s biggest economy, U.S. was in a major crisis, but that they had gotten too used to the country “playing a key role in the economic system and leadership”.

AUSTRALIA

”I don’t want to sugar coat the current situation – if the global economy were to weaken materially, that would obviously have an impact here,” said, Treasurer of Australia, Wayne Swan. He went on to warn that Australia was at the mercy of any downturn in the global economy. While many Australians are feeling uneasy about the economic outlook, we can take confidence from just how different our situation is here at home – we’re not the United States, we’re not Europe,” he confidently said.

On the Treasurers words, Prime Minister Julia Gillard who was invited by the Opposition to repeat her promise to return the budget to surplus in 2012-13 said that he, also made the obvious and common sense statement that impacts on global growth and potential impacts here make it more challenging for us to bring the budget back to surplus, but we are absolutely determined to do so and we expect to do so.’

Time is of the essence. Prompt and clever action needs to be taken to prevent the global economy from spiraling further out of control. Governments will have to not only look into well being of their citizens as well as boosting the economy if they are to find a long term solution.

Sources: CNN, Wall Street Journal, BBC

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