Global Policy Forum

Agreement on a Global Firewall, But Little Beyond That

At the most recent summit of finance ministers, central bankers and international financial institutions (World Bank and IMF) in Washington D.C., the view that countries are divided about what to do to revert the crisis was consolidated. Despite pledges to rack up the IMF’s lending capacity, the contributors are all but in agreement about what should be done with it. Whilst European finance ministers stubbornly praise austerity yet lobby for greater pools of money, the IMF and the World Bank have made clear that “fiscal consolidation” alone will be deleterious. Additionally, several emerging economies argue that fairer representation at the IMF is long overdue, particularly considering the relative sizes of their economies and their generous contributions to the bailout fund.

By Annie Lowery

April 22, 2012

Meetings of finance ministers and central bankers here over the weekend started with a pledge by wealthy nations to significantly increase the lending capacity of the International Monetary Fund to defend against the possibility of worsening economic conditions in the debt-laden euro zone.

But they ended on Sunday without a consensus on just how to speed up the economic recovery, stamp out the European debt crisis or lower unemployment around the world, officials said.

Heading into the meetings, Christine Lagarde, the managing director of the monetary fund and a former French finance minister, had called for a “Washington moment” — a shared sense of purpose about the magnitude of the challenges facing world leaders, and building momentum to tackle those challenges.

“I personally feel that that Washington moment was clearly in the room in the course of the meetings,” she said at a news conference on Saturday.

But Pascal Lamy, the director general of the World Trade Organization, said participants seemed more concerned with political considerations and poll numbers at home than with international cooperation, yielding little progress on hard questions about fostering stable, inclusive growth.

“What’s missing is a common road map,” Mr. Lamy said in an interview. “International cooperation is about doing things you don’t want to do for the common good. But they’re all focused on the short term.”

To be sure, the additional $430 billion in lending capacity contributed by developed economies like Japan, Britain, Saudi Arabia and South Korea was seen as a major achievement. The contributions came after I.M.F. economists determined that countries around the world might require up to $1 trillion in new loans because of the combined effects of the sovereign debt crisis in Europe and sluggish global economic growth. The I.M.F. agreed to raise about half that amount if Europe would raise the other half.

But finance ministers are still at odds over the effect of debt reduction on economic growth.

Many governments, particularly in Europe, believe that indebted advanced economies need to cut their budgets to maintain stability in the financial system.

“Fiscal sustainability in the United States and Japan weigh on the domestic and global outlook and require clearly spelled out consolidation strategies to reduce the risk of a sudden loss of market confidence,” Jan Kees de Jager, the Dutch finance minister, said at an I.M.F. committee meeting on Saturday.

The fund itself, however, warned that austerity could be self-defeating, undercutting growth without satisfying skittish investors in the credit markets.

“Countries were pretty divided” about the appropriate pace of fiscal consolidation, Guido Mantega, the Brazilian finance minister, told reporters, according to Reuters.

“European countries mostly believe that you just need to carry on the fiscal consolidation and economies will adjust,” he said. “But the I.M.F. showed a worrisome picture” if too many countries cut too fast.

Robert B. Zoellick, the outgoing president of the World Bank, echoed those concerns in an interview. “Macroeconomic stabilization, both in fiscal and monetary policies, is necessary but not sufficient,” he said, calling for more attention to the “equally important and under-recognized” issue of reforms for stable, long-term growth.

Nor was the I.M.F. fund-raising accomplished without dissent. Although a dozen countries came forward to join the euro zone in pledging money, there remained differing opinions on what the new pledges meant and how they should be used, and many countries remained on the sidelines.

Canada, for instance, declined to contribute new money to the fund, arguing that Europe had more than enough money to handle its own sovereign debt crisis. “They need to step up to the plate and overwhelm this issue with their own resources,” Jim Flaherty, the Canadian finance minister, told reporters.

The United States also chose not to contribute to the I.M.F., though officials said that Washington supported the efforts to bolster the fund as long as Europe was playing the dominant role in preventing speculative attacks on European sovereign debt and stabilizing the Continent’s financial system.

“The success of the next phase of the crisis response will hinge on Europe’s willingness and ability, together with the European Central Bank, to apply its tools and processes creatively, flexibly and aggressively,” Timothy F. Geithner, the Treasury secretary, said at an I.M.F. meeting on Saturday.

Some European leaders bristled last week at the suggestion — made as rising yields in Spain spurred worries that the country would need a bailout, like Greece, Portugal and Ireland before it — that they had not tackled the crisis with sufficient force.

“I’m always surprised when I read that Europe has not done enough,” Klaus Regling, the chief executive of the European Financial Stability Facility, a temporary bailout fund, said at an event hosted by the European Institute on Friday.

The I.M.F.’s financing drive has also been met with raised eyebrows from the cash-rich, fast-growing emerging economies that were expected to provide much of the new money. That expectation raised the thorny question of whether Brazilian farmers and Chinese laborers should be called on to help finance the debt of Italian office workers and Spanish retirees, especially if those developing nations would not win more voting power within the fund for doing so.

The biggest and most powerful emerging economies — Brazil, China, India and Russia — said they would contribute to the fund. But they declined to specify how much.

Mr. Mantega, the Brazilian finance minister, castigated the I.M.F. for being slow to initiate reforms agreed to two years ago that would reduce the voting power of Europe relative to big emerging economies. He said that the delay had been “deeply damaging to this institution” and called for voting to be strictly proportionate to countries’ economic output.

“Brazil’s economy is larger than that of any European country but Germany and France,” Mr. Mantega said. “Yet Brazil’s calculated quota share is equivalent to that of the Netherlands and smaller than those of Spain, Italy and the United Kingdom.”

On Sunday, Ms. Lagarde announced that she now planned to focus on raising about $17 billion for the I.M.F.’s poverty reduction and growth facility, which offers low-cost development loans to poor countries.


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