Wold Bank Chief: We Are Nearing the Danger Zone

The president of the World Bank, Robert Zoellick, said Sunday that the global economy is quickly approaching the “danger zone.” Speaking in Sydney, Zoellick told listeners that the loss of confidence in the leaders of both Europe and the U.S., is indeed something to be concerned about.

According to Reuters, Zoellick told members of the Asia Society, “What's happened in the past couple of weeks is there is a convergence of some events in Europe and the United States that has led many market participants to lose confidence in economic leadership of some of the key countries."

Not mincing words and apparently well aware of the potential impact of his comments, the World Bank chief added, "I think those events combined with some of the other fragilities in the nature of recovery have pushed us into a new danger zone."

Hoping that leaders on both sides of the Atlantic would take heed to his message to stop messing around, Zoellick said, "I don't say those words lightly ... so that policymakers recognize and take it seriously for what it is."

Zoellick criticized the Eurozone leaders as being “a day late” and behind the curve with regard to the sovereign debt problems that seem to worsen on a daily basis. He added that the markets are becoming concerned that the EU and ECB may not even be moving in the right direction in their efforts to solve the debt dilemma.

Moving further west, Zoellick says that the leadership in the U.S. is ducking the primary problem – entitlement programs such as Social Security and Medicare. He told the audience that Congress needed to address the big problems if they are to be taken seriously.

"Until they make an effort on those programs, there is going to be continued skepticism about dealing with long-term spending."

As anyone who watched the recent events in the U.S. play out knows, it is the political climate and the inability for lawmakers to make even the smallest dent in the big problems that was at the center of S&P’s downgrade. Both Fitch and Moody’s have yet to downgrade the debt rating of the U.S. However, if progress is not made soon, further downgrades are likely forthcoming.

Zoellick suggested that although market confidence has clearly taken a big hit, the really important issue going forward is if there will be a corresponding drop in confidence amongst business and consumers.

The most recent reports suggest that the recent mess in Washington and the debt crisis overseas has not been lost on consumers here in the U.S. The University of Michigan’s Sentiment took a 2.5 standard deviation dive in August as it fell 8.8 points to a reading of just 54.9. For reference purposes, the index stood at 71.8 in June and was as high as 77.5 in February of this year.

Thus, we are of the mind that unless the markets stage an impressive rebound, consumers are likely to remain cautious and will keep their hands in their pockets instead of reaching for the credit card while at the malls.

 

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