With the most acute phase of the global financial crisis behind them, the finance ministers and central bank governors from the IMF’s 188 member countries will gather in Washington, DC this week to focus on three broad topics and one distraction.
The distraction is the US government shutdown and the (theoretical) prospect that the United States may face bankruptcy if it hits the debt ceiling next week. Such a prospect remains a mere possibility, as no political party has an incentive to trigger a material default with catastrophic consequences for the world, not just the US economy. The speaker of the house, Republican John A. Boehner, is likely to call for a vote before the situation gets out of hand, allowing a bipartisan majority of Democrats and centrist Republicans to provide some relief, albeit short and time-bounded, to the Obama administration.
By doing so, Boehner will achieve two objectives: his party will emerge persuasively as able to define the policy contours of President Obama’s second term in the White House; and, within his own party, he will prompt a rebalancing of power, as soon as the potentially devastating consequences of the standstill erode support from the party base for the most hawkish members.
It thus comes as no surprise that the reform of the IMF has become hostage to Washington’s national politics. The “Seoul package” has still to be ratified by the US Congress one year after the agreed upon deadline. This package — endorsed by the Group of Twenty (G20) leaders in Korea in November 2010 — entails a six percent voting shift towards dynamic and under-represented economies and, for the first time in over two decades, a reform of the representation on the executive board, the institution’s main policy-making body.
At this stage, the Democratic administration is unlikely to put any further political capital on the table to push for the Seoul package approval, as IMF reform ranks relatively low in the pecking order of the US domestic political agenda. For the Republicans, this package is perceived to be a legacy of the Obama administration and Obama’s own early, high-profile engagement in the G20.
At any rate, with hundreds of thousands of federal employees furloughed, the outlook for many federal programs still unsettled and the prospect for greater disruption looming, there appears to be no appetite for IMF reform in the United States. As a result, negotiations for the next IMF reform package that was supposed to be agreed upon by January 2014 — and which would have otherwise culminated at the meetings this week — are also at a standstill.
With no hard deliverables on IMF reform from these meetings, but some disappointment from foreign ministerial delegations instead, IMF Managing Director Christine Lagarde will squarely focus on a policy narrative that will outline the challenges facing the global economy from the “Great Recession” to the “Great Transition” on its way to a stable and sustained recovery.
As the exit from the crisis is long lasting, ministers and central bank governors are going to appraise the risks emanating from policies related to: the exit from unconventional monetary policies; the institutional and policymaking architecture in the euro zone; and, finally, the internal rebalancing and economic slowdown of emerging economies.
Unlike previous recessions, the exit from current unconventional monetary policies will take considerable time. The timing will, of course, be set by the US Federal Reserve based on its own assessment of the pace of the recovery and the risks facing the US economy. Given the scope for significant spillovers, however, the rest of the IMF membership will closely monitor the Fed’s actions and escalate pressure on the IMF for countervailing measures aimed at: exerting moral suasion on the United States to calibrate its tapering on the basis of spillovers to the global economy; and promptly deploying the Fund’s own financial safety nets whenever needed.
On the euro zone, the IMF membership will be appraising the latest — still unsatisfactory — developments in the buildup of the banking union. Progress on this agenda item is not unfolding evenly. As the European Central Bank steadfastly proceeds in establishing its own organizational capacity to discharge the new euro area-wide supervisory responsibility, progress on a common financial backstop and resolution authority has lagged behind, despite repeated pleas from the IMF and even early European statements to that effect. While policy makers in Europe have been absorbed into the complex institutional setup of the banking union, the euro zone has still to address the daunting problem of restoring aggregate demand. Early, tentative signs of an economic recovery should not be oversold by the European delegations, as the pace and sustainability of such a recovery may be highly uneven across the euro zone.
Finally, some emerging economies are in the midst of a two-fold challenge. First, they face a domestic challenge in terms of rebalancing the composition of their economic growth towards domestic sources, while moving away from an excessive reliance on foreign demand. At the same time, this transition may be jeopardized by policy developments in advanced economies, which could be related to the tapering off of unconventional monetary policies in the United States, flagging or flat demand in the euro zone or depreciating currency in Japan. The risk remains, however, that a larger-than-anticipated slowdown in emerging economies may significantly affect the already measured pace of the global recovery.