Capital crunch stifles entrepreneurs in low-income economies

Economic

Summary:

The promise of markets and the reality of constraints.

In a vulnerable low-income country, what an entrepreneur typically lacks is not ideas, ability or demand – but financing. Local banks are often undercapitalised, ill-prepared or unwilling to take on risks and capital markets, where they exist, are thin, shallow or inaccessible. The absence of reliable, scalable financing channels thus continues to constrain the entry and growth of new firms and start-ups limiting their economic role to drive structural transformation.

The World Bank’s recent report, ‘Financing Firm Growth: The Role of Capital Markets in Low- and Middle-Income Countries’, sheds light on the scale of this challenge. Drawing on firm-level data from over 100 countries, the report finds that when firms raise capital through markets, their physical investment rises by 8-16% in the following year. Markets, it argues, are not substitutes for banks – they complement them by freeing up credit for smaller borrowers and supporting longer-term investment behaviour.

This message is timely. As concessional finance declines, vulnerabilities mount and aid priorities shift, vulnerable low-income countries must increasingly rely on domestic sources of funding. Efficient capital markets are not a luxury – they are foundational infrastructure for economic growth. Critically, the shift has to be for firms and entrepreneurs – not governments – to borrow to invest, scale and create jobs.

Scope and limits of the evidence

While the report appropriately limits itself to assessing firm-level effects, its findings raise important questions about institutional feasibility. In many vulnerable low-income economies, the legal, supervisory and macroeconomic preconditions required for capital markets to function remain weak or missing. The challenge is not in demonstrating the benefits of markets, but in understanding how such markets might emerge and endure.

The report’s methodology provides valuable cross-country evidence. Yet the analysis could have examined variation across country contexts further, particularly those where markets are still nascent.

Missing institutional architecture

Will capital markets ever become a reality in vulnerable low-income countries? And if not, then what are the alternatives?

After all, the multilateral technical market building efforts from the International Monetary Fund and the World Bank have been active for several decades. The policy frameworks of these vulnerable low-income economies have placed financial systems and capital markets as a reform priority. Yet, these countries are far from meeting their day-to-day financing needs from the local markets.

Could one avenue lie in regional approaches towards capital markets? For small economies, developing national capital markets may be economically inefficient. Regional platforms, such as the West African Bourse Régionale des Valeurs Mobilières, allow participating countries to pool listings, liquidity and infrastructure. They offer scale that no individual country could achieve alone. However, such arrangements would still depend on legal harmonisation, supervisory coordination and sustained macroeconomic discipline – preconditions that cannot be assumed.

A related issue is prioritisation. The World Bank’s report does not differentiate among countries based on structural vulnerability, nor does it tailor its insights accordingly. Yet such distinctions matter. The United Nations identifies 46 least developed countries, the World Bank’s International Development Association lists 75 recipients of concessional finance and the IMF’s Poverty Reduction and Growth Trust supports 69 low-income economies. These classifications, though widely used in development finance, are rarely employed to shape capital market and broader financial sector reform or to calibrate expectations – despite vast differences in institutional and fiscal capacity.

Learning from practice, not just principle

Some are attempting to bridge the gap between evidence and implementation. The African Development Bank, through its Capital Markets Development Trust Fund, has provided tailored legal reform and technical support in over a dozen vulnerable countries. OMFIF’s Absa Africa Financial Markets Index has also grown into a useful regional benchmark, tracking progress in regulatory effectiveness, settlement infrastructure and investor participation. The IMF and World Bank continue to assist countries who wish to implement market development and macroeconomic stabilisation strategies.

Private-sector contributions, by contrast, have been more limited. While some international consulting firms have produced capital market scorecards and diagnostics, many of these rely on assumptions of macroeconomic stability and institutional maturity – conditions often absent in vulnerable economies. These efforts also tend to understate the role of political economy constraints and the hybrid structures through which finance actually flows.

Most documented case studies of success in capital market development focus on upper-middle-income countries. The experiences of smaller and more vulnerable economies – where reforms have been incomplete or politically constrained – remain underexplored. These cases may not yield clean narratives, but they better reflect the institutional realities many countries face. They also suggest the need for more creative, non-traditional policy approaches.

Beyond markets

The international community must move beyond blueprint-based thinking. Capital market development is not a linear process. Political volatility, external shocks and capacity gaps frequently disrupt reform efforts. In such environments, success depends less on ideal models and more on adaptive strategies – ones that allow countries to experiment, iterate and ‘fail forward’ while building institutional confidence over time.

In the near term, policy-makers in vulnerable economies may need to prioritise alternative financial architectures. Public development banks could anchor long-term finance; regional liquidity facilities could underwrite infrastructure investment; and mobile financial ecosystems could broaden access for smaller firms. In many cases, reinforcing informal or semi-formal channels may offer greater development impact than prematurely attempting to engineer deep capital markets.

Ultimately, the hardest policy questions lie not in reaffirming the value of capital markets, but in charting viable, politically and institutionally grounded pathways towards them. For vulnerable low-income economies, where capital market emergence remains uncertain, the priority must be not just vision – but realism.

Source:Udaibir Das

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Devin

Economic

The UK government’s macroeconomic policy was already off track before President Donald Trump’s tariff shocks damaged financial markets, worsened prospects for growth of trade and output and enormously increased uncertainty. It is now highly unlikely that the government’s original aspirations for borrowing, public spending and taxation can all be achieved.

Rather than tying itself in knots vainly trying to demonstrate fulfillment of its manifesto pledges and other earlier commitments, it should view the current crisis as an opportunity to reset macroeconomic policy. This would involve being candid about growth and the poor fiscal prospect over the rest of this parliament while keeping borrowing under control.

Getting borrowing under control

The UK shares low growth and difficult public finances with some other European economies. Rather than indulging in a political blame game over responsibility for low growth and fiscal ‘black holes’, the government should be honest about constraints that low growth causes for fiscal policy and the fact that any benefits of a growth strategy will occur in the next parliament and beyond.

It is essential in the post-Trump turmoil that the government takes no risks with the bond and foreign exchange markets. The dangers are obvious. In the course of 2025, the UK has become the G7 economy with the highest cost of government long-term borrowing, a message from the markets it would be unwise to ignore.

To be best placed to cope with external shocks and to reassure financial markets, the government will need to show that it is prepared to take the necessary decisions to control borrowing. These could include a tight control of public spending but also increases in VAT or income tax. As soon as possible, government borrowing should be solely for investment.

The constraint on public investment will be the willingness of the markets to absorb gilts. In this context, the government should revisit the relationship with the Bank of England to stop its sales of gilts to the market, an unnecessary and damaging process in current circumstances. Gilt sales should be used to refinance maturities and finance investment.

The UK should look outside of itself

The debate about the UK’s low growth of gross domestic product and productivity in recent years has been unnecessarily insular. Currently the underlying growth of productivity is probably lower in Germany than in the UK. In contrast, in the 25 years before the second Trump administration, the US economy with its massive tech sector and world-dominating companies grew significantly more than Europe.

The explanation of and cure for the UK’s low growth is not helped by attributing it largely to the policies of political opponents. Trump’s tariffs and the general uncertainty that they cause could lead to lower UK growth. Depending on the outlook for inflation there may be scope for short-term interest rates being reduced more rapidly and more often.

Where there are crises in individual sectors, the government may come under irresistible pressure to provide financial help, as is already happening in the steel sector. The balance of probability is that the fiscal prospect will be worse than in the spring statement and the government will have to decide how to react.

Reframing fiscal policy

The main constraint on fiscal policy will be the government’s ability to finance its borrowing through gilt sales. Fiscal rules are simply one way by which governments seek to reassure markets that they will act responsibly. Criticism of fiscal rules as being arbitrary and of the role of the Office for Budget Responsibility in showing whether and by how much the rules are likely to be kept is wide of the mark. Without rules it would probably be even more difficult to convince markets of the soundness of government finances.

Any significant rise in projected government borrowing, even if it were all for investment, would be a huge risk at a time when UK borrowing rates are the highest in the G7 and higher than in most European Union economies, including Greece (Figure 1). At first sight it is puzzling that economies like France and Italy, which have larger debt burdens than the UK, have lower long-term interest rates. It may be that lower EU borrowing rates reflect a market expectation that in a crisis the European Central Bank would find ways of purchasing member states’ debt.

The Bank of England is currently engaged in unnecessary monetary tightening. The Bank selling gilts in the market is a monetary policy operation, but it directly impinges on the operation of fiscal policy and should be subject to the same decision-making processes that govern fiscal policy. This is particularly the case at a time when the UK has high long-term borrowing costs by international standards. It would be unwise in the extreme to ignore the message from the markets.

Figure 1. UK has the highest borrowing rates in the G7

Long-term interest rates, % per annum

The tariff crisis is a chance for the UK to reset policy_1

Source: OMFIFanalysis. Data as of 11 April.

Against this economic and market background, the government should reframe fiscal policy. It should move quickly to a position where borrowing is solely to finance investment by reducing the current deficit. In addition, it should vigorously pursue ways to finance investment other than through the bond market. One obvious way to do this is through a revitalised private finance initiative for large infrastructure projects. There are signs that this is happening, such as the Lower Thames Crossing.

The scope for controlling fiscal policy in a low-growth economy solely by cuts in spending plans will be limited, particularly if the government feels obliged to help sectors damaged by the tariff crisis or to provide relief to those parts of the private sector badly affected by the simultaneous higher employers’ national insurance charges, an increased minimum wage and the forthcoming employment legislation.

The firm intention should be that the departmental spending plans for the later years of this parliament – which are unhelpfully due to be published in June rather than with the spring statement or the autumn budget – should not be liable to substantial revision in the autumn fiscal event if lower growth causes forecast borrowing to be higher than the fiscal rules allow. A less damaging response would be a broadly based increase in income tax or VAT.

Source:Peter Sedgwick

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James Riley

Political

Wall Street has been abuzz with ominous warnings lately about the economy: Trump’s tariffs are bound to trigger a downturn, perhaps even a recession.

Torsten Slok, an economist at Apollo Global Management, puts the probability of a recession in 2025 at 90%, while warning that Americans could soon be facing empty store shelves.

Even Federal Reserve Chairman Jerome Powell has suggested that tariffs could trigger a bout of stagflation, which could force the Fed to delay its next rate cut.

But in a note shared with MarketWatch on Thursday, some Wall Street strategists offered a different, data-driven view, arguing that much of the fear surrounding the trade situation may be overblown.

“We believe markets may be overstating the risks to U.S. growth from tariffs,” Steve Englander and Dan Pan, head of global G-10 FX research and head of North American macroeconomic strategy at Standard Chartered, wrote in a note.

First, the Trump administration exempted 22% of Chinese goods (probably the most important ones) from tariffs. Some Chinese goods may remain competitive even with tariffs. Others may be easily sourced elsewhere.

Moreover, the imposition of tariffs was not entirely unexpected, and U.S. importers had plenty of time to prepare. Import data showed that U.S. companies had accumulated large inventories of goods before the end of the first quarter. This inventory buffer should give them plenty of time to weather any potential shocks.

Trump team has avoided a true doomsday scenario for now

Some on Wall Street have pointed to a sharp drop in containerized freight volumes from China to the U.S. as evidence that Trump’s tariffs will soon lead to shortages.

Data does show that container freight volumes heading to the U.S. from China have fallen 50% since mid-April.

But focusing solely on the absolute level of change misses a key context: freight activity levels in mid-April were already quite high, and the levels after the decline are still consistent with freight activity levels for most of 2023.

So far this year, tonnage of cargo shipped from China to the United States is 40% higher than in 2023 and 9% higher than in 2024, largely because of a surge in shipments before the tariffs were implemented.

Englander and Pan calculated that even if the freight pace of early May continued into June, cumulative freight volumes from China to the United States in the first half of 2025 would still be 18% higher than in the first half of 2023 and only 5% lower than in the first half of 2024.

In this case, any decline in imports would amount to only 0.25% of gross domestic product (GDP) relative to 2023 and 0.5% relative to 2024.

“This tariff shock has little precedent, but we judge that the U.S. economy can handle it,” Englander and Pan wrote. “The benefits of the tariffs are uncertain, and they are likely to cause a lot of disruption, but this is not a catastrophic event for the economy.”

Chinese exporters have demonstrated their ability to circumvent tariffs by routing goods through other economies, such as Vietnam, and some goods are likely to remain competitive even with tariffs, Englander said.

“Our biggest concern is that the price increases from tariffs do not have the intended domestic import substitution effect and that the tariffs morph into quantity restrictions — a far worse scenario, in our view,” Englander and Pan wrote in the report.

The U.S. economy has dealt with modest price shocks in the past

Englander and Penn’s final point is that sudden spikes in the price of imported goods have dealt modest blows to economic growth in the past. But most of the time, the economy has weathered such shocks without falling into a painful recession — or, if it has, it has been caused by other factors.

The post-pandemic wave of inflation that hit the U.S. and much of the world in 2022 is one example. Englander and Pan focus on two types of price shocks: those caused by a surge in oil prices, and those caused by a surge in import prices. 2022 is the former.

But there have been periods in the recent past when import prices have risen sharply, whether due to a weak dollar or other factors.

Englander and Penn note that U.S. import prices grew by more than 10% annually before and just after the financial crisis, and they also surged in 2000, just as the dot-com bubble began to burst.

While such price spikes may have been unsettling to many consumers, they did not trigger a recession in either period.

Englander said there is no doubt that tariffs may cause disruptions. But unless the trade war escalates seriously, the US economy should not be hit too hard. He said: "Tariffs may not be a good idea, but as long as only price mechanisms are used, the damage caused by tariffs may be limited."

Source: Jinshi Data

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Owen Li

Economic

Friedrich Merz, the designated German chancellor, admits he has only two years to find success in his likely new job before critical tests emerge in 2027. Merz faces the mammoth tasks of holding the European Union together, stabilising the bruised relationship with the US, building Germany’s defence efforts against a threatening Russia and resuscitating a stagnating economy.

The chairman of the Christian Democratic Union, which won the 23 February election, is due be sworn into office on 6 May at the helm of another ‘grand coalition’. This will be the fourth, and potentially the most problematic, in 20 years between the CDU, its Bavarian Christian Social Union sister party and the Social Democrats (SPD) of defeated Chancellor Olaf Scholz.

Merz will not enjoy even the briefest of honeymoons. One of the biggest questions facing financial markets is whether the planned surge in German spending and borrowing can be accommodated without triggering a rise in bond market spreads in economic and monetary union. This could possibly force fresh bond-raising intervention by the European Central Bank. Merz will face eight big tests.

Merz has little time to rebuild frayed credibility

He retreated from pre-election budgetary caution as a price for agreement from his future SPD partners on a multi-year overall spending package of up to €1tn on defence and infrastructure. His weakened status among stability-conscious conservative voters has been one of the reasons for a decline in CDU/CSU support to 24% to 25% of the electorate, around the same as the far-right Alternative for Germany (AfD), according to latest opinion polls. The AfD is now the second biggest party in the German parliament following the doubling of its score in the election.

A slower than expected timetable for lowering corporate taxation will not help the economy

An expected investment boost from much enhanced depreciation allowances will provide compensation for a two-year delay in lowering headline corporate taxes. Merz admitted the two-year deadline for enhancing German growth in an hour-long broadcast with Germany’s ARD public sector TV channel on 13 April. He has set a target to raise potential annual economic growth to 2% from the present 0.4%. This will be very difficult to achieve without major improvements in productivity.

Reforms have to make an impact in the first two years of the 2025-29 legislature period

The AfD has promised a campaign for early elections in two years if Germany does not achieve turnaround in the crucial issues of immigration and the economy. Another reason for the importance of 2027 is the French electoral timetable. President Emmanuel Macron’s two-term mandate ends with the April 2027 election. France will place maximum pressure on Merz to produce results-enhancing reforms to ensure that France avoids a far-Right incumbent in the Élysée Palace. Many high-spending European growth measures favoured by France and Italy will be anathema to Merz’s conservative supporters already distressed by his pull-back from economic orthodoxy over the so-called ‘debt brake’.

Merz’s most intractable domestic problem is the near impossibility of combining CDU/CSU and SPD approaches on sustaining growth

The SPD is highly leveraged. In its disastrous showing on 23 February, the party recorded its lowest ever share of the vote at 16.4% (12 points behind the CDU/CSU). But it is gaining key ministries in the new government. These include the finance ministry, expected to come under the control of Lars Klingbeil, the ambitious SPD co-chairman. Merz confirmed on 13 April that coalition negotiations almost broke down over the SPD’s wish for new tax increases, which Merz succeeded in rejecting in the light of threats to global growth from US tariff increases.

With understanding between the CDU/CSU and SPD strained by a testing month of coalition negotiations, SPD parliamentarians may not be inclined to back Merz during near-inevitable showdowns over social spending, industry support and immigration. This could raise the likelihood of early elections if the SPD feels its chances are enhanced by severing links with the CDU/CSU and restarting an alliance with the Greens.

Merz will be confronted with great difficulties in brokering compromises on immigration

This was the most toxic issue during the election campaign, exacerbated by a spate of individual murderous attacks in urban centres over the past year. In finding solutions over rejecting asylum-seekers at borders or repatriating family members, Merz will have to find a balance between adhering to European laws and regulations, satisfying SPD humanitarian concerns and winning general consensus from the German population, where the AfD has been stoking concerns about links between criminality and illegal entry.

On Europe, Merz will be a key player in guiding the reaction to changes in the relationship with US and China

He will need to reopen the door to special measures for more dynamic European growth without sparking German grassroots anxieties over imbalanced growth and higher inflation. This will include efforts to win some support for the recommendations of former Italian prime ministers Mario Draghi and Enrico Letta in official Brussels reports over the past two years, which have been largely neglected on the German political scene.

Merz must tread a fine line over defending Ukraine and enhancing Germany’s security

He wants to support domestic industry with planned extra defence spending, satisfy US wishes to ‘buy American’ and bring in a Europe-wide dimension, including non-EU countries. On 13 April, Merz spontaneously mentioned the UK’s 50m population adding to the weight of the EU’s 450m. He expressly called for coordination with Germany’s Nato and European partners over supplying Ukraine with German-Swedish Taurus medium-range cruise missiles, which he said he supports to help buttress Ukraine’s defence against the bombardment of population centres.

Merz will need to give weight to building the euro as a genuine alternative to the dollar on world financial markets

This includes promoting Europe-wide borrowing vehicles to enhance European prowess in issuing ‘safe assets’. Merz may be constrained to give reluctant backing to European mechanisms for additional borrowing for common defence projects and systems – involving extending the Next Generation EU fund beyond 2026, with a different name. Organising higher German borrowing for infrastructure and defence without disrupting other European capital markets will be a major task. Intriguingly, this could involve imaginative solutions bringing the UK into plans for a genuine pan-European capital markets union – which would necessarily have to involve other currencies as well as the euro.

Source:David Marsh

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Kevin Du

Economic

Since taking office, US President Donald Trump has announced a series of new tariff threats that are unprecedented in recent history in terms of their scope and scale. For Europe, they include tariffs of 20% on European Union countries, 32% on Switzerland, 16% on Norway and 10% on the UK.

For the EU, this 20% rate would apply to around €290bn of the goods it exports to the US. When including some €90bn of exports already hit by earlier tariffs on automobiles, steel and aluminum, roughly 2% of EU gross domestic product is now subject to US tariffs.

The president’s decision to authorise a 90-day ‘pause’ on the most recent reciprocal tariffs drew a positive response from financial markets. The EU has also said it will attempt to negotiate with the US administration over the coming weeks. But despite the back and forth, it appears likely that US tariffs in some shape or form will be a durable feature of the trading landscape. Sectors like semiconductors, pharmaceuticals, energy and energy products could also be subject to tariffs in the future.

For Europe’s open economies, the near-term economic effects will only be mitigated by greater defence and infrastructure spending. Based on tariff announcements to date, Ireland, Slovakia, Germany, Hungary, Italy and Austria appear most exposed given their value-added exports to the US make up more than 1% of their GDP. Ireland would bear the brunt of a US decision to extend tariffs to pharmaceuticals given the total value-added exports to the US account for around 8% of its GDP; Denmark is also exposed at around 2% of GDP.

The credit effects for companies will be more material. Risk varies with their exposure to the US market, such as how sensitive US demand is to higher prices, the complexity and length of their supply chains, profit margins and how easily a company can move production or mitigate the impact. Some companies will also need to compete on price with Chinese goods likely to be rerouted from the US to the rest of the world.

European automakers and parts suppliers – a quarter of their value-added exports go to the US – and chemical producers – 18% of theirs – appear most vulnerable, especially as they were already dealing with many challenges before the tariffs were introduced. A US decision to lift temporary exemptions on Canada and Mexico would be particularly damaging to European auto manufacturers given many have production facilities there. Increased competition from China is the main threat for chemical producers. The effects will be mitigated by the fact that many have some manufacturing presence in the US. They should also be able to pass on some of the cost of tariffs to customers depending on the elasticity of product prices.

In addition, the US is a key market for some luxury retailers Moody’s Investor Service rates. There are also high risks for certain spirits like Scotch whisky, cognac and tequila, as well as national beers that depend on specific origins, and products that need ingredients from outside the US, such as cocoa or coffee.

Companies in other sectors are also likely to be indirectly affected through weakened economic activity and financial market volatility. Tariff uncertainty has already undermined confidence globally, impeding business planning, stalling investment and hitting consumer confidence. Given Europe’s already weak growth prospects for 2025, these conditions and slower global growth increase the risk of a recession.

Weaker economic activity will help keep a lid on inflation and allow the European Central Bank to keep monetary policy loose as a result. But this is unlikely to translate into looser credit conditions. Bond spreads have widened materially in response to the US tariff announcements and heightened policy uncertainty, especially at the lower end of the rating scale. This will mainly affect low-rated issuers which need to refinance in the coming years.

The EU’s policy response will determine the full effects on economies and sectors. The EU said it will attempt to negotiate over the coming weeks after the tariff announcements, but will also be prepared to retaliate against US services imports, including digital services. As a last resort, the EU may use the Anti-Coercion Instrument, which allows it to impose tariffs, quotas and other restrictions on goods, services, intellectual property and foreign investments.

Given the increasingly difficult relationship between the EU and the US, which is also evident in the US’ growing disengagement from European security, trading relations between the two regions are likely to deteriorate. This could lead to an EU-US trade war, which would hit consumers and supply chains harder.

Source:Laura Perez Martinez

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Jason

Economic

The International Monetary Fund appears to have recognised that communication is no longer subordinate to economic design, it can make or break reform and change – especially where trust in institutions is thin and fiscal room is limited.

The IMF’s latest Fiscal Monitor dedicates a chapter to public consent as a precondition for good policy. Whether governments seek to phase out energy subsidies, reform pensions or expand tax bases, success now hinges on how well reforms are explained, sequenced and backed by credible commitments.

The report uses large language models to build a new Reform Sentiment Index, analysing over 2m news articles from 170 countries since 1990. The results highlight four enduring patterns.

First, macroeconomic conditions matter: reforms are more likely to succeed during stable growth and low inflation periods. Second, communication quality is decisive: policies land better when governments clearly explain why changes are needed and how they will unfold. Third, targeted compensation works: well-communicated transfers for affected households can soften resistance, whereas diffuse or opaque benefits often fail. Finally, timing and trust are central: reforms implemented outside election cycles and in settings with higher institutional credibility enjoy greater public acceptance.

These findings are not academic abstractions. They reflect lessons from dozens of contested reforms in the global South. In Indonesia and the Philippines, phased implementation and public dialogue helped anchor energy subsidy reforms. In Ecuador and Sudan, in 2019 and 2022 respectively, abrupt price increases without adequate preparation triggered street protests and reversals. In Pakistan and Ghana, repeated programme breakdowns are as much a function of eroded public legitimacy as fiscal mismanagement.

Reforms now live or die on spreadsheets and in the contested terrain of public perception. For policy-makers, this means treating communication not as a postscript but as core infrastructure.

The Global Financial Stability Report takes this further. It links policy ambiguity and weak signalling directly to financial stress. Using measures of geopolitical risk and economic policy uncertainty, the IMF shows how unclear or inconsistent communication widens risk premia, drives capital flight and exacerbates volatility. These effects are especially pronounced in emerging markets with thin buffers and open capital accounts.

Financial markets, like citizens, respond to coherence. Vague central bank guidance, unclear fiscal frameworks or opaque debt restructuring plans now generate market reactions well before any data release or budget vote. Sovereign spreads, currency pressures and investment decisions increasingly reflect what governments do and how credibly they are seen doing it. In that environment, expectation management is no longer optional but macro-critical.

The World Economic Outlook adds a longer-term lens, focusing on the demographic transitions confronting many middle-income economies. Aging populations will place a growing strain on pensions and public healthcare. Structural reforms – longer working lives, pension eligibility changes, expanded labour participation – are fiscally necessary but politically unpopular. These are intertemporal trade-offs: today’s costs in exchange for tomorrow’s sustainability. However, reforms will be cast as austerity, not solvency, unless that bargain is made clear. The WEO underscores that political acceptance depends on a credible narrative. Where communication fails, reforms do not stick. That lesson is consistent across the fund’s work.

A single through-line emerges across the April 2025 flagship reports: communication failure is now a structural policy risk. Moreover, the costs are compounding. When reforms collapse repeatedly, a deeper erosion sets in. Citizens grow cynical. Expectations shift from reform to reversal. This ‘reform fatigue’ weakens state capacity, narrows the scope for action and raises markets’ premium on policy continuity.

The implications go beyond national governments. Global convenings, including the IMF–World Bank spring meetings, are intended to coordinate and communicate. However, for many developing countries, these gatherings can feel like set pieces – complex, hierarchical and difficult to engage meaningfully. If policy legitimacy depends on communication, then institutional platforms must also evolve. Dialogue must move from performance to participation. Institutions, too, must speak clearly – and listen more.

The stakes are high for developing economies, especially. Reforms in these contexts are often externally financed, technically guided and politically fragile. If sentiment turns, the window for action closes fast. Therefore, the quality of communication is not an accessory – it is the very ground on which fiscal, monetary and structural reforms stand.

In short, public sentiment has become a binding constraint – not because democracy has intruded on policy – but because without legitimacy, there is no policy. Without clarity, there is no legitimacy. In a fragmented world, communication is no longer the last mile of policy. It is the first.

Source:Udaibir Das

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Devin

Economic

The European Union promote more ‘homogeneous’ supranational debt issuance to capitalise on international demand for euro-denominated ‘safe assets’. That was the call by Paolo Gentiloni, former Italian prime minister and European Commissioner for economy, at a capital markets conference in Frankfurt organised by DZ BANK, OMFIF and KfW.

Giving the opening keynote speech, Gentiloni said the first 100 days of President Donald Trump’s second administration had been a ‘very loud wake-up call’ for Europe. He underlined a ‘profound crisis of trust’ in relations between the US and Europe, with Trump’s erratic actions on the economy and tariffs undermining international confidence in the dollar.

‘Growth through crisis’

Speaking on 6 May shortly after designated new German Chancellor Friedrich Merz failed to win a majority in the first chancellor vote in the Bundestag, Gentiloni said Europe was accustomed to ‘growth through crisis’. He uttered confidence that Merz – assuming he is elected in the next stage of the parliamentary elective process – would eventually decide appropriate policies with other European partners to drive the continent forward.

Hours after Gentiloni’s speech, in the second round of voting in Berlin, Merz received 325 votes of support from Bundestag deputies, nine more than the required majority of 316 – and was subsequently sworn in as Germany’s 10th postwar chancellor.

On supranational borrowings, Gentiloni said the new German government was unlikely to agree a straightforward extension of the Next Generation EU fund beyond the designated 2026 cut-off date. But he held out the hope that the NGEU and other European borrowing entities could be redefined to fund combined defence spending to meet security threats caused by US disengagement from Europe and Russia’s international bellicosity.

At the root of this issue lies the wish by some European policy-makers to streamline supranational borrowing with a more harmonised approach both by the European Commission and the European Stability Mechanism and by national issuers.

In areas like the planned German fiscal package on defence spending, Gentiloni said Europe would make a mistake if it concentrated extra security spending on purely national capabilities. He outlined sectors and research areas where Europe could both expand its international capabilities and add to productivity improvements. Examples included cybersecurity measures, submarine warfare defence and drone warfare.

Europe should take steps to build euro deposits held by international central banks. He suggested that the European Central Bank could step up its promotional efforts on the single currency. One idea would be for the ECB board member responsible for international affairs to work closely with a designated member of the European Commission to build up the euro’s international status.

Dealing with Trump

Gentiloni was Italian foreign minister in 2014-16 before becoming prime minister after Matteo Renzi in 2016-18 and then a member of the first Commission under Ursula von der Leyen in 2019-24. He had particular dealings with Trump when he visited Europe for the Italian G7 presidency in 2017.

Asked about the psychology of handling the US president, Gentiloni warned against considering Trump in the same fashion as during his first presidency. Trump had moved beyond driving a ‘transactional’ approach in his first term to adopting a ‘revolutionary’ stance in his second four years. In his speech, Gentiloni suggested his role model was Franklin D. Roosevelt, the legendary post-Depression and second world war president – but there were other alternatives.