Mike Callaghan is Director of the Lowy Institute's G20 Studies Centre.
The US debt ceiling crisis was the dominant topic at the recent G20 and IMF meetings in Washington. But did these international meetings have any impact on US policy?
Finance ministers all warned that a catastrophe would likely occur if the US government defaulted on its debts. The IMF Managing Director said it was 'mission critical’ that the US agrees to a new debt ceiling. The World Bank President said that the US was just days away from a very dangerous moment. The Chinese Deputy Finance Minister said that he hopes the US heeds global concerns.
G20 finance ministers, meanwhile, stated that ‘the US needs to take urgent action to address short-term fiscal uncertainty’. A call for ‘urgent action’ may seem a bit mild given the dire consequences being predicted, but this was reported as a ‘rare G20 rebuke’.
Did these international reproaches have any impact?
With the debt ceiling negotiations going down to the wire, and a temporary increase the likely outcome, it is hard to see that the concerns being expressed by the world had any influence.
There is no point rebuking the Obama Administration. It is well aware of the implications of a default. The US Treasury Secretary warned Congress of ‘the irrevocable damage such an approach would have on our economy and financial markets’. To have impact, the global concerns had to resonate with Congressional Republicans and Democrats – yet they do not appear to be listening to the world. Martin Edwards and Stephanie Senger examined US congressional speeches following critical comments by the IMF in 2011 on the state of the US budget. They found only two oblique references to the IMF’s views and even those were not supportive.
The IMF is not influencing the US political debate. Edwards and Senger conclude: ‘If the Fund’s recommendations don’t translate into policy debate when sent blocks away from the US government, it is difficult to hope they will find traction when sent from afar’. He notes that the IMF has much to learn about how to better make its messages heard.
But how do you reason with someone who repeatedly shoots themselves in the foot? The latest bout of brinkmanship over the debt ceiling is part of the ongoing sclerosis in the US political system. This will continue and the resulting uncertainty will increase. It has imposed a cost to the US economy, the reputation and leadership claims of the US, the legitimacy of international institutions and to the stability of the global economy. Let us count the ways:
1. There are estimates that the political paralysis surrounding US fiscal policy has cost the US more than two million jobs and slowed annualised economic growth by 1 percentage point of gross domestic product since 2010. The current bout of concern over a US default has resulted in renewed calls for less reliance on the US dollar, with China’s official Xinhua News Agency saying that the time has come to start considering a de-Americanised world.
2. The status of the US dollar as the world’s international currency has given the US what has been termed an ' exorbitant privilege’, the ability to borrow more cheaply than it could otherwise. While there have been previous calls for the world to reduce its reliance on the US dollar, there have been few other options as a reserve currency. But this may quickly change if holders of US Treasuries start to worry about whether they will be paid. If countries increasingly seek to reduce their exposure to US Treasuries, even at the margin, this will put significant pressure on other currencies and add to capital volatility.
3. The debate over the debt ceiling prevented President Obama attending APEC meetings and brought into question the US commitment to Asia.
4. The US failure to ratify the quota and governance reforms in the IMF, which will increase the quota share and representation of emerging markets, is undermining the legitimacy of the Fund. A package of reform measures was agreed by the G20 in 2010, but implementation is held up because the Obama Administration cannot get the reforms through Congress. This is in turn holding back further reforms in IMF governance.
The result is that emerging markets are increasingly looking at alternative options for a safety net to respond to volatile capital flows. The BRICS have agreed to a $100 billion currency fund to help deal with capital volatility and an increasing number of bilateral swap arrangements are being settled. As the Indian central bank governor recently said, countries will avoid the IMF unless they are desperate. It is all adding to uncertainty.
US political gridlock is causing increasing costs on the US and the world. So how can the world influence US policy? The rebukes may become less rare and the communiqué language more direct. This may help. But it is hard to see how the world can be more effective in influencing the US Congress.