Jan. 21, 2012 – 2:53 p.m.
Political Economy: Financial Fallout
By John Cranford, CQ Columnist
What, if anything, does it mean that the United States is refusing to participate in a bailout of Europe’s struggling economies? For now, little or nothing, since they don’t pose much immediate danger to the United States or its financial infrastructure.
But the stance taken by the White House and most lawmakers does raise questions about the role of the International Monetary Fund at a time when global financial stresses seem too much for governments alone to manage. And it raises concerns that central banks — particularly the Federal Reserve — are being left to handle the load.
In the face of clear political opposition, President Obama repeatedly has said that he would not commit a dime to bailing out Southern Europe — which mostly means not bailing out the European banks that are the at-risk creditors.
Last week, in an added fillip to earlier administration dismissals that this is Europe’s problem and can be easily addressed by its well-heeled states, the Treasury Department said the United States would not participate in a request to boost the IMF’s resources by $500 billion. Europe has pledged $200 billion toward that effort, but even the United Kingdom is hesitating to join in.
That money would go to bolster the finances of countries in danger of defaulting on their debts, and the proposal opens the door wider on a long-running debate over what the IMF should be prepared to do in such crises. “We continue to believe that the IMF can play an important role in Europe, but only as a supplement to Europe’s own efforts,” the Treasury said in a statement. “The IMF cannot substitute for a robust euro area firewall.”
Fair enough. The 17 countries that make up the eurozone (not counting the 10 members of the European Union that don’t use the euro as their common currency) compose an economy roughly as large as that of the United States. The population of those 17 countries is a bit larger than ours, and their combined gross domestic product — a proxy for national income — is a bit less. So, Europe may have the resources to take care of its own.
But that said, the United States can hardly afford to sit by idly and watch a succession of important European states collapse. Our economic ties with Europe — not to mention our social and political connections — are tight. U.S. trade with all of the EU is greater than U.S. trade with Canada. More critically, perhaps, total trade flows with the eurozone in 2010, including investment earnings, exceeded $900 billion and yielded a slight surplus in the United States’ favor.
So, America has ample reason to devote attention to the continent’s financial stability, if not taxpayer money.
Role of the Fed
That unwillingness to pitch in — a complication of these more insular, tea party-driven times — doesn’t entirely explain the administration’s position on the IMF. And it exposes the Fed to criticism for its operations in this arena.
The IMF was created at the end of World War II precisely to deal with the threat to currency stability from sovereign defaults — although the odd eurozone arrangement in which the single European Central Bank (ECB) serves the economic needs of 17 countries with very different political imperatives may not have been in the imaginations of those who met at Bretton Woods in 1946.
In 2009, the Obama administration was more than willing to go to the mat for a $100 billion increase in the U.S. commitment to the IMF. And Congress went along. The way these things are handled, there was no actual transfer of taxpayer money to the IMF — it’s handled as a credit swap — and there was almost no risk that money committed by the United States would be lost.
In fact, the 2009 infusion was handled slightly differently than previous IMF commitments. In recognition of the unlikely event of a default that would draw down the IMF’s holdings — and cause a loss for the United States — the Congressional Budget Office scored the transaction as a potential credit risk of $5 billion. Even so, there was still no actual cash outlay.
Political Economy: Financial Fallout
The administration’s current posture on the IMF means Europe will have to find alternative resources to bolster its troubled states — and the ECB may not be constitutionally capable. It also means a global conversation about the IMF’s role in the 21st century will necessarily be put off, at least until after the presidential election.
Finally, it means that the Fed will continue to shoulder the heaviest portion of the global financial burden, in the face of continued criticism of its outsized role in pulling the world economy back from the precipice over the past few years.
Critics object that the Fed’s currency swaps with the ECB constitute a bailout of European banks that need dollars that would be more costly to obtain through other means.
Perhaps that’s a debate worth having. But the fact remains that, with the IMF constrained by limited resources and the ECB held back by its member countries, the Fed is the only institution with the money and political independence to operate unilaterally. For now, it has chosen to step up and worry about the fallout later.