Attempts by individual nations to fix their own economies are important. But the great recession now rippling around the world is an international problem, and the best way to fight it may be a more aggressive international response.
That’s the message President Obama and Secretary of the Treasury Timothy Geithner are sending in advance of this weekend’s meeting in London of finance ministers from 20 advanced and developing nations.
This doesn’t mean the US government wants to establish a multinational treasury that will run the globe from an island lair. But it does mean that Washington thinks key European and Asian nations need to spend more on economic stimulus – and that over the next few months the US hopes to establish some general principles for greater cooperation on everything from International Monetary Fund resources to regulation of banks.
“We need to make sure we’re working together ... we need to begin to establish a framework,” said Federal Reserve Chairman Ben Bernanke in a March 10 appearance at the Council on Foreign Relations.
Leaders meet April 2
World leaders, including Mr. Obama, will meet in London on April 2 for a global financial summit. The finance minister meetings this weekend are intended to serve as a general planning session for the April 2 gathering.
On March 11, Secretary Geithner outlined an ambitious international agenda, including a 10-fold increase, to as much as $500 billion, in the size of the reserves that the International Monetary Fund can draw upon to help countries in economic trouble.
The US’s share of this expanded rescue fund would be an extra $100 billion. The cash is used for loans, not direct grants, but increasing the US’s commitment to the IMF could be tough to sell to Congress at a time when the bill for domestic aid already boggles many lawmakers’ minds.
The intent of increasing the IMF’s lending power is to help stabilize emerging markets and developing nations that can’t afford big stimulus packages.
More world stimulus
The second major item on the US agenda for the global finance meetings is an attempt to cajole other developed nations into spending more to stimulate economic demand in their own countries.
The United States’ recently passed stimulus bill amounts to about 5.5 percent of the nation’s gross domestic product. US officials want the rest of the world to pump up domestic spending with stimulus packages of at least 2 percent of their own GDPs.
An IMF report released last week held that only the US, Saudi Arabia, China, Spain, and Australia have hit the 2 percent stimulus goal. Germany, by way of contrast, has pumped about 1.5 percent of its GDP into the domestic market via new government spending. The French stimulus equals about 0.75 percent of GDP.
Furthermore, the US wants the IMF to continue to produce an international stimulus report card, by issuing data quarterly on country efforts scaled against GDP.
“We believe it is important for [nations with the world’s largest economies] to commit to substantial and sustained actions for a period that matches the likely duration of the crisis,” said Geithner on March 11.
Double IMF's money
European nations have reacted enthusiastically to the proposal to double IMF resources. The European Union, in a joint policy statement prior to this weekend’s meetings, said that it is “essential” that the IMF have the means to help weaker countries fight the crisis.
The US’ appeal for more stimulus spending, however, has met with a much cooler response.
EU finance ministers insisted that they were already doing enough to pump up their own spending. The richest nations of the single-currency eurozone – Germany, France, and Italy – are wary of running up bigger deficits and launching a round of inflation. The call to increase stimulus efforts as soon as possible appears to have caught them off-guard.
“There was a significant amount of bewilderment about this in our discussion,” German Finance Minister Peer Steinbrueck said on March 10.
Instead, the Europeans would like the upcoming financial summit to focus on means of regulating international banking and currency flows, so as to prevent future crises with similar roots to today’s.
Short term vs. longer term
The cooperation needed now is of two sorts, according to Ralph Bryant of Brookings. With financial fires already raging, existing fire brigades must fight the problem now with efforts including economic stimulus packages.
But because existing firehouses, their equipment, and regulatory codes are inadequate, medium- and long-term efforts to improve the situation via new regulations may be required.
In other words, both US and European priorities may be necessary.
“The world didn’t seem ready a year ago [to address these problems in a coordinated manner],” says Bryant. “Now we’ve got a huge emergency and people ought to be rethinking their positions.”
– Associated Press material was used in this report.