NEWS ANALYSIS: Obama, Lagarde head to G-20 facing shaky global economy

BY WALL STREET JOURNAL, NOVEMBER 10 2014, 19:22

The (politically bruised) leader of the world’s largest economy and the head of the global financial counsellor honed their message of co-ordination at a White House meeting last week ahead of the Asia-Pacific Economic Co-operation forum in Beijing and a meeting of the Group of 20 largest economies in Brisbane.

The Obama administration and the IMF are worried Europe, Japan, China and other major emerging markets aren’t doing enough to spur growth.

Just as the US economy shows signs of gathering steam, they’re concerned that dimming overseas demand and a strong dollar will put the brakes on American growth.

The eurozone faces rising risks of a third recession in five years. China is trying to balance a slowdown with the need to overhaul its economy.

Japan’s central bank is being forced to goose growth with more easy-money policies because other government efforts aren’t enough to juice inflation and revive prospects.

Emerging markets are facing dwindling growth outlooks, failing to live up to vows to restructure their economies. And the economic and political crises in Ukraine and the Middle East, which threaten to turn into much more dangerous regional conflagrations, are fuelling investor anxieties.

That leaves the US doing the heavy lifting for the global economy.

Mr Obama and Ms Lagarde are on the same page on many of the policy problems and solutions.

“They discussed the global economic recovery and the IMF’s role with regard to US national security priorities, including financial support for Ukraine and countries in the Middle East and North Africa,” a White House official said.

The official said the two also conferred on emergency financing for Liberia, Sierra Leone and Guinea, the three countries worst-hit by the deadly Ebola outbreak. The IMF has said the beleaguered and impoverished nations will need more international aid to fight the epidemic.

The US and the IMF back more stimulus by the European Central Bank to spur eurozone growth.

Both are advocating governments around the world spend more on infrastructure as a way to inject more cash into their economies.

They’ve both criticised regional powerhouse Germany for not doing enough to spark eurozone growth. They’re fretful Tokyo isn’t going to deliver on a promised economic restructuring, setting the stage for a potential eruption of Japan’s Mt Fuji of debt.

The Obama administration and the IMF are concerned that major economic overhauls in countries such as Brazil, India and China aren’t moving ahead fast enough to ensure global consumption can fuel the world’s economy.

And they are also likely to back a push for greater financial oversight, shifting focus from the traditional banking sector to the largely unregulated financial sectors where economists worry new crises could be developing.

The IMF’s top financial official, José Viñals, warned last week that shocks, such as from another European recession, the Ukrainian crisis or unexpected US rate hikes, could trigger major market sell-offs.

“The need for action is now,” Mr Viñals said.

Monetary policy can’t be the only game in town, he said.

“It needs to be better supported by … fiscal policies, structural policies and financial policies.”

In trying to win over his peers on a decisive growth strategy, Mr Obama will face a political headwind: he has lost some clout in the realm of economic diplomacy in his administration’s failure to secure congressional approval for governance changes at the IMF.

The five-year-old deal would restructure the emergency lender by giving emerging markets greater power at the fund, more in line with their burgeoning economic heft in the world.

Feeling disenfranchised, key emerging markets are crafting strategies to bypass Washington and its leverage at the fund, including replicating the IMF’s emergency-lender role with new cash reserve pools.

“The US failure to get supporting legislation for IMF quota reform is a huge black eye,” said Fred Bergsten, senior fellow and founding director of the Peterson Institute for International Economics.

By highlighting “the IMF’s role with regard to US national security priorities,” the White House is likely signalling that Mr Obama will redouble efforts at home to get the governance changes through Congress.

It’s still an open question, however, whether the new Republican majority will help or hinder the president’s plans.

Weekly Review: Last Week’s Top 5 International Business Headlines

1France Eyes Libya Deals After Unfreezing $2 Billion Assets   (arabiangazette.com)

France said on Monday it was ready to start releasing almost $2 billion in frozen assets belonging to Libya’s sovereign wealth fund, as it looks to secure investment from the oil-producing nation. France’s Foreign Minister Laurent Fabius made the announcement during a visit to Tripoli, the latest in a series of high-level French political and business delegations to the OPEC member. France spearheaded efforts to oust Libyan leader Muammar Gaddafi last year and, as part of wide-ranging international sanctions, froze about $8-9 billion in assets held in France. Read all.

2. East or West? Ukraine to Choose its Path Ahead of EU Summit this Month (Washington Post)

According to an old folk tradition, if a man knocks on the door of a Ukrainian beauty with a marriage proposal but does not win her heart, she will reject her suitor by presenting him with a pumpkin. Who will get the pumpkin from Ukraine at the end of this month — Russia or the European Union? Read all.

3. Europe’s Economic Rules. Berlin vs Brussels (The Economist)

SINCE the euro crisis started in early 2010, the debtor nations on the periphery of Europe have become used to strictures from Germany, not least for running big balance-of-payments deficits. On November 13th, for once, it was Germany’s turn to face a possible ticking-off. For the first time since more stringent rules and oversight were put in place to try to avert future crises, the euro area’s unofficial leader, hub economy and chief creditor is to be investigated. Its misdemeanour? Running too big a current-account surplus. Read all.

4. Is Europe Turning Japanese? (Wall Street Journal)

The euro zone’s 0.7% October inflation reading convinced the European Central Bank to cut interest rates last week. It also spurred a lot of nervous talk that low inflation and slow growth mean Europe is entering a Japanese-style “lost decade.” There are ominous similarities between the euro zone today and Japan at various points in the 1990s, even if you allow that economies can stagnate each in their own way. But there are also reasons not to believe that Europe is doomed to suffer Japan’s malaise. Read all.

5. Economic Overhaul: China Opens Doors to More Private Competition       (Russia Today)

In the biggest economic turnaround in two decades China’s leaders have pledged more private competition in dominant state industries. The new economic plan aims at rejuvenating a slowing economy and also eases limits on foreign investment in e-commerce. The changes promised in a Friday report issued after a closely watched Communist Party conference compares with the effort at market-style reforms in 1978 that launched China’s economic boom, the Associated Press says citing the state media. Read all.