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Europe uneasy in IMF spotlight as Tokyo meetings start
International Monetary Fund (IMF) Managing Director Christine Lagarde attends a debate program of seminars at the annual meetings of the IMF and the World Bank Group in Tokyo October 11, 2012.
Credit: Reuters/Issei Kato
TOKYO |
TOKYO (Reuters) - Greece, Spain and the euro zone's slow progress toward debt reform take centre stage at IMF meetings on Friday despite Europe's best effort to remove itself from the spotlight.
The International Monetary Fund recommended that some of Europe's debt-burdened countries take a bit more time to reduce budget deficits, arguing that moving too fast is counter-productive because it hurts the economy.
But Germany, Europe's largest creditor country and the key to any lasting fiscal reforms, pushed back against that advice and said reversing course on promised deficit reductions would only weaken credibility.
"The euro zone does not lack the financial wherewithal to stem the crisis. What it lacks is the political will," former IMF official Eswar Prasad, a senior fellow at the Brookings Institution in Washington, wrote in the International Herald Tribune.
While the IMF has advocated a slower approach to debt reduction, it urged swifter policy action, both in Europe and the United States, to remove economic uncertainty and help lift anemic global economic growth.
"We expect action, courageous and cooperative action on the part of our members," IMF Managing Director Christine Lagarde said, spelling out her expectations for the twice-yearly meetings that start on Friday.
In Europe, the IMF wants to see more progress toward promised reforms that would create a tighter fiscal and banking union. In the United States, the IMF has sounded the alarm over the "fiscal cliff" of automatic spending cuts and tax increases that take effect early next year unless Congress acts.
European officials insist they are on track to deliver reforms, and want to see closer scrutiny of the U.S. fiscal issues instead. U.S. Treasury Secretary Timothy Geithner said Washington has a window of opportunity to address the fiscal cliff after the November 6 presidential election.
Both topics will be on the agenda, along with the IMF's own internal reform efforts, which have stalled.
The Fund was supposed to have completed by the Tokyo meetings a set of voting reforms that would give fast-growing emerging markets greater say in the international lender and vault China to the No. 3 spot.
But U.S. presidential politics got in the way. The Obama administration is reluctant to seek congressional approval for additional IMF funding when the budget deficit is such a hot-button election issue. Without U.S. support, the IMF reforms lack sufficient votes to pass.
(Additional reporting by Reuters IMF team; Writing by Emily Kaiser; Editing by Tim Ahmann)
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Taking stock of the reach and the role of government in the economy, we must not draw from back from rigorous analysis of established platforms in seeking to determine if the financial system as currently constituted is best placed to execute the role of driving economic growth.
Central to any such analysis must be the fact government is by and large dependent on a healthy economy to fund its expenditure. The linkage and risk to growth of this dependency is evident in this latest manifestation of economic weakness and declining growth, as the finances of national governments, in some cases already impaired as a result of prior economic downturns, lax budgetary discipline, or a combination of both, fall further and further into deficit and debt, reducing their capacity to influence or utilize monetary corrective measures, both adding to and prolonging the downturn.
The fix to this unintended, but inbuilt weakness and risk to economic well-being will require in the first instant an alternate that reduces the dependency of government on taxation to fund expenditure: and an unwavering commitment by government to fiscal (budgetary) accountability and discipline, thereby mitigating / removing government as a future threat to growth.
Consider then that government as a lender –specifically a mortgage lender-is positive in three major aspects: the public gain as the cost of debt is reduced increasing housing affordability and disposable income; the government gains as revenue increases, reducing the need for borrowings, reducing / eliminating deficits and reducing debt to GDP ratios; finally the capital markets at a stroke enjoys a massive boost, as a mountain of liquidity is directed to the corporate bond and equity markets, both deepening and widening the pool and sources of funding for small and corporate business investment.
Now is the time for our elected representatives to look at expanding the role of government to incorporate a direct financial presence. A successful determination may lead to government providing access to home mortgages at 4% return over 25 years, facilitating a housing recovery, reviving economic growth and putting the jobless back to work. What better signal to the market, of a strategy and method to exit the crisis, than government in receipt of a continuing revenue stream, outside of taxation to fund future expenditure, and so energize the private sector to get on with the business of growing the economy, confident in the outlook of the treatment for business profits.
How soon we exit the current financial crisis is up for grabs, of one thing we can be certain. We must look to strengthen the financial system, ensuring the system is better positioned to serve the needs and interest of the public, government, and small and corporate business, all at one and the same time.
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