IMF on sidelines as US budget fights brew nearby

Associated Press

WASHINGTON (AP) – International Monetary Fund chief Christine Lagarde travels the world trying to keep the global economy on track. But some of the greatest threats are brewing just blocks from her Washington office and there’s little she can do about them.

The IMF has been left largely on the sidelines as Democratic and Republican fights over the budget raise the specter of a U.S. default or another recession. The tools that give the IMF leverage in other parts of the world don’t work in Washington: The U.S. isn’t looking for a bailout and the IMF wouldn’t have enough money if it were. It can offer advice from its highly regarded economists, but, in Washington, those are just a few expert voices among many.

Any attempt by the IMF to broker a deal between Democrats and Republicans would be almost inconceivable. Neither side is looking for the IMF to be a referee. And with the United States being the largest IMF shareholder, the fund cannot afford to antagonize lawmakers who must approve the U.S. contribution.

“I can’t think of a strong enough word for the negative reaction if the IMF tried to get in the middle,” said Jim Kolbe, a former Republican congressman from Arizona. “Even though someone on the international level indeed needs to give us a spanking in this case to tell us that we are setting a very bad example for the rest of the world.”

The IMF’s lack of influence in Washington shows the limit of its powers at a time it has raised its profile, taking a central role in efforts to resolve Europe’s financial crisis. That marked a change for an organization more commonly associated with bailing out developing countries and imposing strict, often unpopular conditions in exchange for its help.

In the EU, the IMF has leverage through its loan programs in Portugal, Ireland and Greece. The EU has relied on it not only as a source of funding for ailing members, but also as an honest broker to help restructure their economies. But there is no similar role for the IMF in the U.S., despite international worries about the ripple effects of any downturn in the U.S. economy, the world’s largest.

Global financial markets rise and fall as President Barack Obama and congressional Republicans face off in a series of high-profile budget fights. Most recently, a last-minute New Year’s deal avoided a “fiscal cliff” of automatic tax increases and spending cuts that many economists said could have thrown the country into a recession. But more fights are pending about the automatic spending cuts, which have only been delayed. Another dispute over the government’s borrowing authority could result in a U.S. default if a deal isn’t reached.

Beyond those immediate issues are broader questions about the United States’ long-term financial health, given its massive budget deficits.

The IMF is hardly ignoring these problems. Lagarde talks about them in many of the countries she visits. Last week in Malawi, she urged developing nations to shore up their own economies so they can withstand the effects of any downturns in the United States and Europe.

“If those two advanced economic zones are going into recession, that will have a major impact around the world,” she said.

IMF spokesman Gerry Rice says IMF officials do influence U.S. policymakers. They have regular meetings with the Obama administration and members of Congress and have raised concerns about U.S. fiscal policy.

Lagarde occasionally has the ear of Obama directly. The IMF also has other channels with the administration. Lagarde’s deputy, David Lipton, was previously a top economic adviser to Obama and former fund officials now serve in the White House.

The IMF also issues policy recommendations for the United States, as it does for all its 188 members. It has urged the United States to gradually reduce its debt with a balance of tax increases and budget cuts. But while many countries eagerly anticipate reports about their economies, knowing they can influence their ability to borrow in international markets, the IMF reports on the United States are seldom cited by American policymakers.

Some analysts have questioned whether the IMF tones down its criticism of United States to avoid problems with a country that provides much of its budget. Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics, said the IMF missed earlier opportunities to raise alarms as the U.S. debt problems were building. He said the fund was too timid last decade in identifying imbalances, including trade deficits and rising spending and tax cuts under the George W. Bush administration.

Rice says the IMF in its analyses treats the United States just as it would any other member.

But a former IMF executive board member, Domenico Lombardi, says the IMF’s relationship with the United States is complicated.

“They try to influence with quiet persuasion,” said Lombardi, now a fellow at the Brookings Institution. “In practice, they don’t want to upset the largest shareholder.”

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