On assuming office in January 2017, the next U.S. president is very likely to face the most challenging of international economic environments. This will make it imperative that the new president acts to reassert U.S. leadership of the global economic and financial system. In particular, bold U.S. action will be required to promote global macroeconomic policy coordination with a view to keeping international markets open and to preventing a further slide towards beggar-thy-neighbor currency adjustments. In addition, renewed efforts should be made to reform the International Monetary Fund to better equip it to properly fulfill its mandate and to make it more representative of the emerging market economies’ increased importance.
Over the next year, it is all too likely that a number of factors will coincide to create a very troubled international economic environment that could constitute a major headwind to the U.S. economic recovery. The
Chinese credit bubble must be expected to continue bursting, while the formerly rapidly growing emerging market economies must be expected to continue struggling with low international commodity prices and an overly indebted corporate sector. These conditions risk a renewed intensification of Europe’s still-unresolved sovereign debt crisis and they could very well complicate Japan’s ongoing battle with deflation.
In these challenging circumstances, a first priority of the new president must be to promote effective global macroeconomic policy coordination. Such an effort would be more effective were it to be done with a reduced group of the economically most relevant countries such as China, Germany, and Japan, rather than in the unwieldy setting of the Group of 20.
A striking weakness of the present international financial system is the lack of meaningful exchange rate rules that raise the real risk of a global currency war. It would be helpful if the new president were to provide international leadership towards putting in place clear rules of the game to limit the degree to which countries might use unorthodox monetary policies or other measures to deliberately weaken their currencies. In that context, consideration might be given to reviving former Treasury Secretary Tim Geithner’s idea of targeted external current account balances.
In recent years, there has been a drift in the emerging market countries away from seeking multilateral solutions towards regional solutions to economic and financial problems. To arrest this unwelcome tendency, the new president should renew efforts to reform the IMF’s governance structure to give the emerging market countries a greater voice commensurate with their increased economic importance. In this context, to make IMF reform more palatable to the U.S. Congress, the new president would be advised to push for an end to IMF “exceptional financing” and a return to the IMF’s traditional role of being a catalytic lender that would limit the degree to which U.S. taxpayer money might be put at risk.
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