The issue of whether and how much to increase the lending power of the International Monetary Fund (IMF) to reinforce its ability to cope with the euro area crisis is among the most debated at the IMF-World Bank meetings this week. The pledges have reached $320 billion, which falls short the target of $400 billion or more called for by IMF Managing Director Christine Lagarde, which itself is a downward revision of the previous IMF request for $500 billion announced last January.
Cooperation is a very complex game, particularly when many players are involved. The euro area members have tried to address the problem by creating their own firewall of $1 trillion. A reinforcement of these resources is nonetheless essential for both Europe and the global community. The larger the firepower deployed, the smaller the probability that it will be needed. A timely and coordinated action by the global community is far more effective than contingency plans to cope with sudden challenges.
A number of considerations may have prevented agreement, however. The international community has waited to see how far Europe would go in raising its own resources. The United States has so far withheld overt support of the IMF’s initiative, arguing that Europe must first put up more funding of its own, although no doubt the Obama administration has been influenced by domestic politics in an election year. The United States has also declined to put up its own funding for Europe. Accordingly, potential contributors would mainly be big surplus countries, including China, Japan, and the oil producers.
Some of the hesitation by the United States might be explained by a reluctance to enhance China’s already large weight in international economic policy, although American officials say they can well understand China’s own reluctance to step forward. Japan has pledged $60 billion, fully aware that a financially and economically stable Europe is necessary for its trading partners in Asia. There is no doubt that China and others share this view. Chinese authorities have stated their goals and pursued them consistently in recent years. It wants a stronger international role for the renminbi, but is concerned about the risks of an overly rapid transition to such a new status, as I have argued recently. As an emerging global leader, China seeks a larger share of rights and duties in the IMF and the World Bank and a stable and productive relationship with the United States. The US-China dialogue on most issues has been constructive and has improved mutual understanding. A clear example of this atmosphere is the issue of the equilibrium exchange rate of the renminbi. A recent study by my colleague William R. Cline concludes that, if continued, the policy of gradual real appreciation of the renminbi under way since June 2010 will restore current account balance equilibrium in a few years.
There is a potential for further cooperation between the two countries, and between China and the global economy, which would yield extraordinary results if fulfilled.
In the current situation, China has a tremendous opportunity to reinforce its role as a global leader and make a contribution to European stability consistent with its aspirations. If China were to step up to the plate with the IMF on Europe, it would reinforce the Chinese claim for a larger representation in the Bretton Woods organizations. It would improve the dialogue with the United States and the European Union and encourage Brazil and other BRICS (Brazil, Russia, India, China, South Africa) countries to follow the Chinese example. Such a step would also reinforce the IMF’s ability to cope with its challenges; it would even provide a safe means to diversify China’s huge international assets, since the IMF has never lost a penny of any member’s money.
I will not discuss amounts here, since C. Fred Bergsten has already expressed his suggestions in an interview published on this site. But contribution equivalent to that of Japan, in terms of share of foreign exchange reserves (those of Japan stand at around $1.3 trillion dollars versus around $3.1 trillion for China) would place China in a position in line with her sizeable financial strength.
If it steps up, China can help Lagarde achieve her $400 billion goal (and maybe more than that) and meet the expectations of supporters of a solution to Europe’s problems in the interest of the global economy.