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Europe should boost the Bretton Woods institutions by Sander Tordoir, 1 December 2023 The EU should reinforce the World Bank and International Monetary Fund to stave off a destabilising financing crunch for many emerging and developing economies. In the past couple of years, Russia has invaded Ukraine, there have been eight coups d’état in the Sahel and there is still a risk of a broader conflagration in the Middle East. On October 24th, the EU’s High Representative for foreign affairs Josep Borrell said that the countries in Europe’s neighbourhood had turned into a ‘ring of fire’. The surge in conflict and instability around Europe is part of a global trend. According to the UN, the world is facing the highest number of violent conflicts since World War II. Two billion people live in places affected. The reasons behind the global upsurge in violence are not just economic. But a debt crisis in poorer countries may further fuel instability, limiting those countries’ ability to fund basic services like health and education. Today, 60 per cent of low-income and 25 per cent of middle-income countries are struggling to pay their creditors or have already defaulted on their commitments. Generally, developing countries rely on official development aid (ODA), multilateral development banks (MDB), bilateral government creditors and bond markets for outside funding. And if countries are unable to repay their creditors and face a debt crisis, they can go to the International Monetary Fund (IMF) for a bailout. One of the factors driving the current crisis is that, as global interests rates have risen, it has become harder for poorer countries to obtain funding from private bond markets. Before it dried up, bond market finance had grown in importance. Between 2005 and 2015 it increased three-fold for low-income countries eligible for concessional (below market-interest rate or outright grant) funding from the World Bank and five-fold for lower middle-income countries eligible for its main lending window. Since 2013, many poorer countries have also turned to China, which has disbursed roughly $1 trillion in Belt and Road Initiative (BRI) finance for development projects. But Beijing is bruised from many of its BRI loans going sour in places like Zambia, Sri Lanka and Ghana. China has consequently cut the flow of new lending down to a trickle, although it is handing out some opaque bailouts to countries where it has large financial or political interests, such as Mongolia or Pakistan. CER INSIGHT: EUROPE SHOULD BOOST THE BRETTON WOODS INSTITUTIONS 1 December 2023
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