„There is no winner of the turmoil“

Andreas Dombret shares his key takeaways from the spring meetings of the IMF and the World Bank and outlines possible scenarios for the future of Western financial institutions and the development of the European and US economies. 

During the week of April 12, the world’s financial community gathered in Washington DC for the spring meetings of the International Monetary Fund and the World Bank. The G20, currently chaired by South Africa, held meetings at the fringes, as did the International Institute of Finance (the global association of commercial financial institutions) and other private and public sector participants.

As one would expect, the recent moves by the US administration and their impact on financial markets very much dominated all discussions. Political, economic and financial uncertainty has skyrocketed. Financial markets took a significant hit, with stocks, the US dollar and US Treasuries down in parallel – which is quite different to previous episodes of financial stress when the US dollar and US Treasuries benefited from their safe haven status.

While financial markets have improved somewhat after President Trump announced the temporary suspension of “reciprocal tariffs” there is still plenty of substantial uncertainty on what the future will hold. Not only is the 10% “baseline tariff” still in place: The situation with China, one of the most important trading partners of the United States, has escalated further. And there is no clarity on the way forward on the reciprocal tariffs, although there is increasing optimism – also after country officials used the occasion of their presence in DC to meet with US officials – that some settlement may be possible.

„The US dollar is the world’s reserve currency“

The long-term implications are even less clear. Recent moves have put into doubt the future role of the United States on the global stage. This does not only pertain to trade or security, but also to the US‘s role in the global financial system. Today, the US dollar is the world’s reserve currency, and US Treasuries are the world’s reserve assets. The US Administration has reaffirmed its intention to keep it that way. But while one would think that the „exorbitant privilege“ of being able to have US debt financed by others in its own currency would be the envy of everyone, there are important voices within the Trump administration that see this as a burden that contributes to an artificially overvalued currency that is seen as undermining US competitiveness.

Recent capital flows from the US to Europe could be interpreted as evidence for a loss of trust in the United States. Still, market participants point at the long overdue rotation away from an overvalued US stock market towards other regions, now merely triggered by uncertainty. But the economic outlook has worsened markedly, and the IMF’s global growth forecasts have been cut accordingly. However, the IMF still expects the US to grow faster (1.8% in 2025 and 1.7% in 2026, down from 2.8% in 2024) than the eurozone (0.8%; 1.2%) and especially Germany (0.0%; 0.9%). This should be no surprise as the long-standing economic issues Europe is facing – such as low productivity growth and lack of innovation in key industries – largely remain unaddressed. The jury may still be out on which side carries what share of the tariff burden. What is already clear, however, is that there is no winner of the turmoil and any future rebalancing of the world economy.

Finally, the week in Washington saw intense discussions on the shape of future global cooperation and international institutions. The current U.S. administration is known to be skeptical of the current set-up and is openly discussing a withdrawal from the very institutions that have historically been used to enhance U.S. influence on the global stage. Treasury Secretary Scott Bessent reaffirmed support for the IMF, but stressed the importance of the fund focusing on its core mandate of helping countries in financial distress.

He made clear that the expansion of its work into development funding (ESG, gender, etc.), which took place  over recent years and which has continuously been criticized even by the IMF’s own staff, does not get further support of its largest shareholder. Mr. Bessent also emphasized that U.S. participation in regulatory coordination (Basel Committee, Financial Stability Board) and the transposition of international standards into the US rulebook will be more targeted. He left open the question of what this means for the Basel standards on banking regulation, given that the administration is considering relaxing certain rules. All this means that banking regulation may once again become a matter of competitiveness, with potentially increasing risks to financial stability.

„All public institutions sit at the cornerstone of trust“

My personal 4 main takeaways from the meetings in Washington are as follows:

• Uncertainty is far higher than usual, as is unpredictability of policies. All public institutions sit at the cornerstone of trust, and the US authorities are no exception.
• While it is clear that tariffs will have a negative impact on growth, the impact on inflation is far from clear.
• The US dollar is still a safe haven, but the longer the tariff conflict continues, the more incentives there will be for alternative mechanisms (e.g. the digital euro) to be established. At the same time, we are witnessing a slowly developing sovereign debt crisis in the United States.
• The world has taken the US policy stance of the past for granted for too long a time, but this may not at all be warranted in the future.

No doubt: Recent developments will leave a significant mark on the global economy. How deep, pronounced and persistent this mark will be depends on the next actions of the US administration and its main trading partners. There is still a window of muted optimism, but this window is closing fast.

Prof. Dr. Andreas Dombret is a former Board Member of the Deutsche Bundesbank and former Supervisory Board Member of the ECB. He is a Member of the Board of the Atlantik-Brücke as well.