The other second wave

A spectre is haunting Washington, D.C.: the spectre of austerity. At the current Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group (Bank), the international community is negotiating not only the future course in the response to the pandemic, but also indirectly the future of democracy.

The agenda includes the usual highlights: The presentation of flagship reports such as the Fiscal Monitor, World Economic Outlook, and Global Financial Stability reports of the IMF. The World Bank will present the World Development, Global Economic Prospects, Poverty and Shared Prosperity, and Doing Business reports.

Nevertheless, this year's approach differs fundamentally from previous years. Due to the Covid pandemic, the thousands of bankers and financial experts who usually come to Washington were unable to travel. Instead, they are now meeting virtually for seven days from October 12 to 18.

There have also been unusual goings on at the tops of the organizations: In a kind of “castling” match, the outgoing IMF Managing Director Christine Lagarde was replaced at the end of 2019 by the acting head of the World Bank Kristalina Georgieva.

However, since the IMF is responsible for lending and surveillance and the Bank responsible for poverty eradication, there were certainly some hopes attached to this change. Would Georgieva's experience lead to greater support for poverty-relevant recommendations in the IMF? In fact, at the beginning of the pandemic, Georgieva's comments were at first rather unusual: "These are the times for which the IMF was created - we are here to use the strength of the global community to help protect the most vulnerable people and revive the economy," the IMF chief said.

What has the IMF done since then? First, it suspended bilateral Article IV monitoring to focus on global monitoring. This involved 80 emergency loan processes. No small matter: in a normal year, the number of comparable cases is three or four. In addition, the IMF has - together with the G20 - created a Catastrophic Containment Relief Tranche, which relieves 34 eligible low-income countries of debt service for two years. A Debt Service Suspension Initiative was also created, which offers eligible countries "flow relief" and delays their debt service by four to five years. However, the private sector has remained on the sidelines. This is likely to worsen rather than alleviate the crisis, especially since the composition of government debt has increasingly shifted to private creditors.

Particularly worthy of discussion: The Fiscal Monitor of spring 2020 called on the world's governments to "do what is necessary" with emergency measures to combat the effects of the pandemic on people and companies. At the same time, the IMF explicitly called on governments to "keep the receipts" - a clear indication of the exceptional nature of the aid and the long-term accountability of governments. This admonition to save receipts is at least covert evidence of a return to austerity that makes many developing countries (and their supporters) more than nervous.

But this is not without consequences: It is true that many hard-pressed governments have certainly made use of the aid programs. Others, however, have shied away from seeking emergency assistance or have reduced their aid requirements to inadequate levels for their real needs. The reason: they fear a downgrade by rating agencies and other negative reputational damage as soon as they make use of emergency loans. And, of course, they are worried about the fundamental swelling of their debt burden. Progressive interest groups are therefore now demanding, for good reasons, an extension of the Debt Service Suspension Initiative until at least the end of 2021 and a debt rescheduling.

When finance ministers and central bankers from around the world meet online this week, the debate is usually conducted at a technically advanced level. However, the complexity of the negotiations cannot and must not hide the fact that the consequences of the decisions taken this week will be severe. If a return of austerity were to come through the back door, the consequences for the stability of democratic systems would be considerable - not to mention the human cost. The consequence of the first wave of austerity was a worldwide triumph of populism and a strengthening of autocratic regimes. Against this background, a second wave of austerity would probably be difficult to cope with democratically in many places. 

Governments and experts now meeting (virtually) in Washington should therefore ensure that developing and emerging countries have the necessary resources to fight the virus, protect the vulnerable and recover through a model of sustainable development. For as long as we lack a universal vaccine, every country is and remains vulnerable. A courageous multilateral effort is therefore needed to bring about the necessary socio-ecological change in the global economy and to survive the pandemic. This requires a willingness to act, a sense of responsibility and cooperation - but none of this requires a new dogma of austerity. 

Dr. Michael Bröning is the Executive Director of the Friedrich-Ebert-Stiftung (FES) in New York. Sara Burke is a Senior Policy Analyst with the FES New York office and works on issues of global economic policy and finance.

A German version of this article is available here.