Each year, political and economic hotshots have a grand rendezvous in Davos, Switzerland to discuss current issues affecting the global economy. For 2012, the official theme of the World Economic Forum (WEF) was “The Great Transformation: Shaping New Models” as they talked about the growing role of the developing nations and the ongoing euro zone debt crisis.
As expected, discussions focused mainly on the euro zone’s debt problems and how the leaders think the crisis could be resolved. Majority of the participants emphasized the need for a bigger euro zone crisis firewall, insisting that the euro zone should put more money in its rescue funds.
According to IMF head Christine Lagarde, increasing the size and scope of euro zone’s rescue funds could provide trust and inspire confidence in the financial markets. Even if not all the funds end up being used, a larger firewall could assure neighboring nations that a debt contagion is less likely.
In fact, some nations such as Japan and the U.K. pledged to boost its contributions to the IMF if the euro zone agrees to increase its firewall. That’s as good as saying “C’mon, euro zone, just do it!”
The good news for the euro zone is that WEF participants believe that the region isn’t probably going to break up anytime soon. In a survey conducted before the participants headed home, it was revealed that guests estimated a 21% chance that the euro zone will crumble in five years.
Aside from that, compared to the previous year’s summit, fewer finance officials predicted the euro’s demise since Greece seems close to reaching a deal with its creditors. The survey also showed that non-Europeans were more pessimistic about the euro zone’s prospects than Europeans themselves.
On another note, world leaders expressed their confidence in the Swiss National Bank‘s (SNB) ability to keep the Swiss franc grounded. If you’ll recall, in September 2011, the SNB decided to peg the franc against the euro to keep it from appreciating in value and damaging the Swiss exports industry.
Some doubt has been shed on whether the SNB can sustain its campaign following the unexpected resignation of SNB Chairman Philipp Hildebrand, but delegates of the WEF seem convinced that the central bank can maintain the EUR/CHF floor at 1.20, regardless of who ends up behind the reins.
Overall, it looks like I wasn’t pretty far off with my predictions for this year’s WEF. Though world leaders weren’t really able to come up with any new resolutions to lift the global economy, their general positivity and willingness to cooperate did help inspire confidence in the markets.
But the question of whether or not the global economy can survive the European debt crisis can only be answered by the concrete actions that financial institutions are willing to take. As many have already pointed out, the ECB and IMF may be able to buy the euro zone more time, but nobody should be complacent.