Business Times - 28 Sep 2011
IMF meeting makes little difference in current crisis
The main obstacles to resolving the economic woes are political in nature
By LEON HADAR
WHAT happens if a tree falls in the forest and everyone does hear it - but then no one cares? Assessing the outcome of the weekend's meetings of the International Monetary Fund (IMF) in Washington - a lot of important attendees, including finance minister and central bankers and a lot of media hype - the answer is: Not much happens.
The global economy may be on the verge of another devastating financial crisis that could be precipitated by Europe's government debt problems. That is the main reason why the financial markets have been trembling in recent days.
But after days of meetings in Washington where leading financial officials from around the world convened for the IMF-World Bank fall meeting, it was obvious that notwithstanding another statement in which the 187 members of the IMF pledged to work decisively and in a coordinated way to deal with European debt problems, the ability of the IMF as an institution to affect the policy decisions of its member states was very limited.
In a way, the IMF can help only those who want to and can help themselves. If governments in Europe's capitals - or for that matter, in Washington and Beijing - lack the political will and power to make the painful political decisions to fix their respective economies, there is not a lot that any multilateral organisation - whose decisions, after all, reflect the interests of its most powerful members - can do.
There was a time not long ago in the 1990s that the Anglo-American model of economic reform and growth (aka the Washington Consensus) could provide the road map for resolving global economic crisis. That was when Time magazine referred to Fed chairman Alan Greenspan, Treasury Secretary Robert Rubin and his deputy, Lawrence Summers, collectively as the 'Committee to Save the World'. This committee could apply the financial resources of the IMF (dominated then by the US and its allies) to help the economies of Russia, Asia and Latin America to avoid financial bankruptcy by forcing them to embrace the kind of fiscal and monetary policies that seemed to be working for the Americans and the Europeans.
Timothy Geithner had served at that time as a junior member of the Committee to Serve the World. But unlike in the 1990s, now the European and the American economies are on the verge ofÂ bankruptcy and need to be saved.
So there was something pathetic at the sight of Treasury Secretary Geithner providing advice to his European counterparts on how to deal their monetary mess. Specifically, he called for relying on a more powerful European Central Bank (ECB) to solve the Greek debt crisis.
Mr Geithner was offering this crash course to the Europeans a few days after the most recent decision by the US central bank - which is supposed to serve as a model for the ECB - launched a new US$400 billion Operation Twist aimed at lowering long-term interest rates that has clearly failed to cheer the financial markets.
Moreover, as Mr Geithner was addressing the European financial officials, lawmakers on Capitol Hill were still arguing over a spending Bill that should have extended government operations into the new fiscal year and provided federal funds for disaster relief. The wrangling again raised the spectre of a federal government shutdown.Â
Indeed, the failure of politicians in Washington or in Berlin and Athens to provide an effective response - or any response, for that matter - to their respective economic problems demonstrates once again that the main obstacles to resolving the current economic crisis are political in nature.Â
The 'concrete' actions that the stock markets as well as consumers and business are waiting for cannot be agreed on by the IMF, but only by the national governments that are responsible for making painful decisions that are bound to upset economically distressed voters and create backlash from powerful interest groups.
That explains why Christine Lagarde, the new IMF managing director and the first woman to head the organisation, failed to mobilise support from the members and in particular, of the eurozone, for concrete action, such as the recapitalisation of the ECB.
That Ms Lagarde had served the France's finance minister and played a leading role in advancing her government's strategy during the ongoing European financial crisis may not even help her to influence the decisions made by current French economic officials.
In any case, the IMF does not have the financial resources to respond to the needs of a eurozone that is trillions of dollars in debt. It cannot bolster the current US$384.5 billion European rescue fund. Whether the Europeans will agree to increase the resources available to the fund will depend very much on the decisions made by the governments and parliaments of Germany and the other wealthy members of the eurozone (whose taxpayers will have to pay for the rescue) and by the governments and parliaments of Greece and the other debtor economies (whose citizens will have to adopt unpleasant austerity measures).
That these political decisions could have a huge effect on the outcome of the next elections in Germany and France is one reason why it has become so difficult to make them.
And politics is also central to the US response to the crisis in the eurozone. Many American banks are exposed to Europe's debt problem and a collapse of financial institutions in Europe could force the US economy into another recession and ensure that Barack Obama would not be re-elected as president next year.
A weak American political leader presiding over a weak American economy is now waiting to see whether the weak European political leaders in charge of a weak European economy would make things even worse than they are for him. But one thing is clear. He cannot rely on any Committee to Save the World to help him save his own presidency.
Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.