Economic leadership at crux of turmoil: Zoellick

August 15, 2011 - 12:25:09 am

SYDNEY: World Bank chief Robert Zoellick said yesterday that investors had lost confidence in the economic leadership of several key countries, warning global markets were in a “new danger zone” as a result.

Zoellick said a convergence of events in the United States and Europe had rattled investors in countries already struggling to cap sovereign debt issues and unemployment.

“And what we’ve seen is that confidence is a fragile element of how the market economy works,” the World Bank Group president told an Asia Society dinner in Sydney. “And I think that those events combined with some of the other fragilities... have pushed us into a new danger zone. And I don’t say those words lightly.”

Zoellick said he was making the point, not so people would run out of the room to call their brokers, but so that policy makers would take it seriously.

He said the United States had contributed to the drop in confidence in the markets following the bitter debate in Congress to ensure that the country did not end up with a disastrous debt default. “It’s not that the United States faces an imminent problem,” he said.

“Frankly, markets are used to the United States playing a leading role in the economic system and leadership and so when they saw the ‘Sturm und Drang’ in Congress and with the executive, it made them uncertain about, well does the United States really know where it’s going? And is it going to get there?”

The problems were more serious in the eurozone, he said, where the processes for dealing with sovereign debt and some competitiveness shortfalls had lagged. “We’re kind of moving from drama to trauma for a lot of the Eurozone countries,” he said.

Financial markets have suffered dizzying swings in recent days and weeks on mounting concern that the eurozone debt crisis and weak US economy could help see the world fall back into recession. But Zoellick said how much impact the rollercoaster ride will have more broadly depended on how much the loss of confidence spread.

“What I’ve described so far is market confidence but the real issue here is whether the market confidence goes to business confidence and consumer confidence and those are some of the issues that we don’t know yet,” he said.

Zoellick, who heads to Australia’s political capital Canberra on Monday, said the global financial landscape was rapidly changing, adding that prior to the recent turbulence, he had concerns about overheating in some developing economies.

While he refused to pinpoint which other countries could suffer due to the market volatility, he noted that the developing world remained a source of growth. He said the pace of change in the previous decade had been enormous, as he pointed to the potential for the Chinese yuan to become a reserve currency in the future.

“The reality is that the dollar, for many reasons, will remain the principle reserve currency,” he told the gathering which included political and business figures.

“But I think that we are likely to move to a system where there will be multiple reserve currencies. “Over time I believe the renminbi could be part of this but, obviously, China has to move towards an open capital account,” he said.



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