Political Turmoil Leaves World Finance Heads in Policy Limbo

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Republican presidential candidate Donald Trump waves to supporters after speaking at a campaign rally on April 11, 2016, in Albany, New York.

Photographer: Eduardo Munoz Alvarez/Getty Images
  • Trump's rise, Merkel's struggles threaten established order
  • IMF cuts global growth forecast, warns of political risks

Politics will be a much bigger factor than usual in the latest get-together of finance ministers and central bankers to discuss the world economy.

From the rise of populist anti-trade presidential candidates in the U.S. to inroads by anti-immigration parties in Europe and a crippling corruption scandal in Brazil, political upheaval is casting an outsize shadow over global growth. That means officials who are more accustomed to charting gross domestic product than tracking opinion polls are being forced to contemplate the economic aftershocks of a potential world with Donald Trump as U.S. president or without Angela Merkel as German chancellor.

The rumblings across the globe, while not necessarily on the official agenda, may be a key topic of conversation for the policy makers from 188 countries who gather in Washington this week for spring meetings of the International Monetary Fund and World Bank. IMF Managing Director Christine Lagarde has acknowledged the issue: In a speech in Frankfurt last week, she said political and other threats, including terrorism, are feeding “uncertainty and fear” and exacerbating the risks to the global economy.

Lower score means greater risk
Lower score means greater risk

“We’re experiencing the most geopolitical risk probably since the Cold War,” said Ian Bremmer, president of Eurasia Group, a New York-based consulting and research firm. “You can have a meeting with all these finance ministers from all these countries around the world, yet you’re not going to resolve a lot unless you fix the politics.”

The IMF cut its global growth forecast again on Tuesday and warned that the world risks falling into stagnation if policy makers don’t act. Political and geopolitical dangers include a potential turn toward more nationalistic policies in the U.S. and Europe, damage if the U.K. were to leave the European Union and strains from large-scale refugee flows, the fund said.

“In many countries, the lack of wage growth and greater inequality have created widespread senses that economic growth has mainly been for the benefit of economic elites and mobile capital,” IMF chief economist Maurice Obstfeld told reporters in Washington on Tuesday. “Lower growth reinforces this turn toward inward looking, nationalistic attitudes.”

In her speech last week, Lagarde highlighted how politics and the economy are intertwined. Persistently mediocre growth has consequences for the social and political fabric of many countries, she said.

‘Stacked’ Deck

While inequality is declining between countries, within nations “perceptions abound that the cards are stacked against the common man -- and woman -- in favor of elites,” leading people to question “established institutions and international norms,” Lagarde said. “As history has told us -- time and again -- this would be a tragic course.”

The U.S. presidential election is a case in point. Tapping into anger among voters who believe they’re falling behind, Republican frontrunner Donald Trump has opposed the Trans-Pacific Partnership and other trade deals. The same goes for both contenders for the Democratic nomination, Hillary Clinton and Bernie Sanders.

“The one that I think would be the most disruptive is a Donald Trump presidency, because some of the things he’s said are so unsettling and destabilizing that the spillover calculus is almost unimaginable,” said Douglas Rediker, a fellow at the Peterson Institute for International Economics in Washington and a former U.S. representative on the IMF’s executive board. “You’ve got 188 countries that have to respond to a new paradigm about which they don’t have a clue.”

The political stress is not having a big effect on financial markets yet. The MSCI All-Country World Index of Stocks has rebounded more than 12 percent from this year’s low in February. Brazil’s real is up 13 percent against the dollar this year, the most of 16 major currencies tracked by Bloomberg. Malaysia, another nation with an embattled leader, has seen the ringgit rise more than 10 percent in 2016.

While political issues likely won’t be discussed in the formal sessions of the IMF meetings, they may be the hot topics on the sidelines, Rediker said.

Refugee Crisis

In Europe, a flood of refugees from the war in Syria and terrorist attacks in Paris and Brussels are threatening to upend the political order. Last month, Merkel’s Christian Democratic Union suffered defeats in two states, losing ground to an anti-immigration party that has told Germans to have more children to avoid the need for foreign nationals.

Opposition to the European project is also coming to a head in the U.K., whose voters will decide on June 23 whether the country should remain a member of the European Union. The referendum has opened a rift in the cabinet of Prime Minister David Cameron, who is campaigning for the U.K. to stay in the EU.

Parties that oppose European integration and immigration have made unprecedented electoral gains in countries including Austria, Denmark, Finland and France, Standard Chartered Plc analysts said in a research report last month. The war in Syria is “engulfing” Europe, with the refugee crisis threatening the free flow of residents that lies at the heart of the EU, the investment bank warned.

“Political debate is becoming increasingly polarized across many developed countries, raising new uncertainties and undermining the consensus politics that fostered efficient decision-making at both the national and international levels,” according to the Standard Chartered report.

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