Virtually the entire membership of the G20 shifted over the past few days to get behind International Monetary Fund Christine Lagarde’s effort to raise more than $400-billion ( U.S.) to build a stronger bulwark against the threat posed by the European debt crisis.
Countries such as Britain, South Korea and Australia made pledges Friday, allowing Ms. Lagarde to announce that she had raised roughly $430-billion in bilateral loans. Ms. Lagarde told a press conference that the IMF now has access to $1-trillion, an awesome figure meant to assure global investors that no country will be allowed to collapse should economic conditions take a drastic turn.
Yet Mr. Flaherty fought the creation of that international firewall until the end – and kept on fighting after the matter was settled at meetings of G20 finance ministers and central bank governors on Thursday and Friday. At a press conference Friday evening, Mr. Flaherty kept up his months-long attack on the bigger members of the euro zone, repeating that they haven’t done enough on their own to deserve international help.
“They need to step up to the plate and overwhelm this issue with their own resources,” Mr. Flaherty said. “There are adequate resources in Europe to address these issues and they ought to be employed.”
At a G20 meeting in Mexico City in February, Mr. Flaherty was among the majority. The group refused Europe’s request for help via the IMF, saying the euro zone had to put more of its own money on the table. European countries responded a few weeks later with a pledge to speed up the creation of a financial backstop pegged at $1-trillion. The strategy adopted by the euro zone was the minimum of several options under construction, yet many observers, including Jacob Kirkegaard of the Washington-based Peterson Institute for International Economics, said the amount was enough to deal with another sovereign default, or to recapitalize banks.
Mr. Flaherty maintained that there was not “uniformity of opinion” on boosting the IMF’s resources. Yet Canada and the United States were the only developed economies that declined to deliver funds. It’s widely considered that the Obama administration is sitting out because seeking money from divided Congress in an election year would be a futile effort. Canada’s obstinacy is harder to understand, and is starting to take a toll on the Harper government’s reputation among those who frequent the halls of the IMF’s headquarters in Washington.
“Canada, like the U.S., has apparently decided to stay out of the coalition of the willing,” said Domenico Lombardi, a senior fellow at the Brookings Institution in Washington who used to represent Italy at the IMF’s board of executive directors.
“It is not at all clear what the rationale for this choice has been in the case of Canada,” Mr. Lombardi added, noting that Canada represents Ireland – one of three euro-zone countries that have been bailed out by the European Union and the IMF – on the IMF’s board.
Mr. Flaherty’s stand against the adding to the IMF’s resources distracted from some moderately positive developments.
The G20’s outlook for the global economy brightened, saying in statement Friday that the “tail risks facing the global economy only months ago have started to recede.” The G20 said it “stands ready” to counter excessively high oil prices. However, the group acknowledged that world economic growth is only “moderate” as households and governments in advanced economies pay off debt. “Downside risks still persist,” the statement said.
The biggest of those downside risks is Europe, where Spanish borrowing costs have climbed back to uncomfortably high levels amid doubts the government will contain the country’s massive deficit. There are also widespread worries that Europe’s banks lack capital, and will continue to retrench rather than boost lending that would help the euro zone escape recession.
Arming the IMF is seen as a way to calm nerves. No one talks of the fund needing to deploy any of its newly amassed firepower so long as the situation in Europe remains stable. No country has ever lost money lending to the IMF, which takes a senior position in any bailout arrangement, meaning it is the first creditor to be repaid.
Mr. Flaherty’s position on IMF resources contrasts with that of someone he calls a friend, Agustin Carstens, the former Mexican finance minister who is now leads his country’s central bank.
Speaking at an event in Washington Friday, Mr. Carstens said he too thinks the European response to the debt crisis is lacking. More is needed, but Mr. Carstens said he recognizes that European countries are facing excruciating political decisions, whether it is asking taxpayers in relatively well-off countries to help weaker members, or sacrificing national sovereignty to forge a stronger economic union. Mr. Carstens said the decision to boost IMF resources will buy the euro zone some time to sort out the politics of what is left to be done.
The “collaborative effort outside the (euro) region is giving them tools to make the hard decisions,” Mr. Carstens said. “This will benefit the entire world, which is why you see countries doing this.”
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