Outgoing World Bank President Robert Zoellick warned that Europe was facing a “Lehman’s moment” and the collapse of the euro currency could trigger a global crisis, in an interview published yesterday.
Zoellick will warn the G20 summit that Europe risks sparking a financial meltdown that would have desperate consequences for developing countries, he told the British newspaper the Observer.
“Europe may be able to muddle through, but the risk is rising,” the 58-year-old American said.
“There could be a Lehman’s moment if things are not properly handled,” he added.
The 2008 collapse of US financial services firm Lehman Brothers — one of Wall Street’s most prestigious companies — after its risky bets on the US housing market soured, sparked global financial panic.
Zoellick said developing nations needed to “prepare for the uncertainty coming out of the eurozone and the wider financial markets. It will be better if they can avoid piling up short-term debts that can come due in volatile periods and look to the fundamentals of future growth — infrastructure and human capital.”
Zoellick, who steps down at the end of this month after five years in charge of the global financial -institute, said the World Bank was taking action to prevent a credit crunch in southeast Europe and to protect north African states exposed to Europe’s debt crisis.
He said the Washington-based institution was focusing on helping emerging economies to protect the most vulnerable if another global financial meltdown occurred.
“Uncertainty in markets is now starting to increase costs for -developing countries,” he said.
The World Bank had been -increasing its lending to support Bulgaria’s banking system — one of the most exposed to Greece — and acting to prevent a credit crunch in southeast Europe, the paper reported Zoellick as saying.
The bank was also taking unspecified measures to protect countries in north Africa that were vulnerable to Europe’s debt crisis and trade finance facilities were being strengthened for francophone west Africa, the newspaper added.
“Uncertainty in markets is now starting to increase costs for developing countries,” Zoellick said. “The ripple effects are making everybody’s life harder. Given the volatility in the world economy, there is a big emphasis on helping developing countries to develop social safety nets that don’t bust the budget.”
Zoellick said Brazil and Mexico had shown the way forward using effective, low-cost targeting, the right mix of incentives plus information technology.
The G20 summit of world leaders is being held in Mexico today and tomorrow.
He said the higher interest rates being paid by Spain and Italy was down to the failure of fellow European countries to give the “right backing.”
Zoellick said he was worried that the lengthy crisis was beginning to lead to demands for economic nationalism.
“This is not just an economic crisis, but a political threat as well,” Zoellick said. “We must make sure we keep markets open and beware against creeping protectionism. We are starting to see some increase in the use of trade restrictions.”