Treasury Secretary Timothy F. Geithner yesterday unveiled a sweeping plan that calls on the United States and other nations to offer billions more to bail out economies in crisis and prods a reluctant Europe to prop up the reeling world economy with more aggressive government spending.
But the campaign is triggering controversy on both sides of the Atlantic. In Europe, some officials doubt the wisdom of falling deeply into debt to create jobs and halt the plunge in consumer demand, as the United States is doing. On Capitol Hill, members of Congress have grown wary of approving still more money.
Geithner said the administration will ask Congress to make $100 billion more available — nearly doubling the current U.S. commitment — to the International Monetary Fund to aid struggling nations. U.S. lawmakers said yesterday that they are already bracing for the administration to request hundreds of billions of dollars in more rescue funds for U.S. financial firms, and possibly a second massive economic stimulus package as well.
The debate over how to rescue the global economy is setting up a clash of ideas just as finance chiefs are converging in London this weekend to hash out a unified approach to the crisis.
Geithner said he plans to press his counterparts from major economies to boost their fiscal stimulus and to sustain that spending for as long as the downturn lasts. "Forceful" actions by the world's leading economies are needed because "the global recession is deepening," Geithner said.
Fresh data out of China, which had been a rare source of good news, showed exports there plunging a worse-than-expected 25.7 percent in February, indicating that the drop-off in world demand is accelerating. The World Bank this week warned that the world was heading into its first global recession since World War II.
Given the intricate ties among economies across the world, Geithner said, it is critical for leading economies to move together in a "sustained" and "coordinated" fashion.
That includes boosting the amount of money available to organizations such as the IMF, he said. His proposal calls for the world's leading economies to provide a total of $500 billion in additional loans — far more than what the institution has asked for and what the Europeans have backed.
Yesterday, E.U. finance ministers, after a meeting in Brussels, signaled their reluctance to boost their stimulus packages, with some rejecting outright U.S. calls to step up their spending to combat the crisis. They have even shown a reluctance to bail out their own, rejecting a call by reeling Hungary — one of the member states in hard-hit Eastern Europe —to set up an emergency $241 billion fund for the region.
While the United States hopes nations will pass stimulus packages that amount to 2 percent of each country's annual economic activity — a conservative estimate of what damage the crisis may cause — Europe has resisted that standard. German leaders have approved a stimulus package that would spend only 1.5 percent of the country's annual economic activity, known as gross domestic product. French officials have signed off on about half that.
"Recent American appeals insisting that the Europeans make an additional budgetary effort to combat the effects of the crisis were not to our liking," Luxembourg Finance Minister Jean-Claude Juncker told reporters after the Brussels gathering.
Less opposition exists elsewhere around the world. China says it wants to spend 2 percent of GDP for its economic stimulus, while Saudi Arabia is moving toward a 3.3 percent package.
'Very positive step'
There is a measure of consensus among leading economies that the IMF needs more money. A growing number of nations are concerned that the organization could be overwhelmed by the global crisis. In November alone, it parceled out $50 billion — the most it has ever spent in a month. And as more countries in Eastern Europe, and perhaps even Western Europe, may need to draw on extensive new lifelines, the fund is poised to spend tens of billions more in the coming months.
"We welcome the proposal from the U.S. Treasury as a very positive step toward assuring the global financial system that the IMF has the appropriate level of resources to meeting the needs of its members," said William Murray, an IMF spokesman.
The United States makes two types of contributions to the IMF. It provides $10 billion in loans that backstop the fund, which the administration wants to increase to $100 billion. In addition, as the world's biggest economy, the U.S. makes the single largest contribution — $45 billion —to the organization's general operating fund.
Other nations, including major European countries, Saudi Arabia, Canada and other regular contributors, could offer loans to the IMF that would account for the rest of the $500 billion, approximately tripling the organization's total funding. Japan has already agreed to contribute $100 billion more.
In a communique yesterday, European financial ministers suggested that they would be prepared to make additional contributions, but they apparently disagree with the United States over how much. They backed a proposal to increase the loans made available to the IMF by $250 billion.
They also called for the burden to be divided fairly among many nations, including those with large currency reserves — a thinly veiled reference to nations including cash-rich China and Saudi Arabia.
Emerging giants
IMF sources said China, which maintains the world's largest currency reserves but does not provide supplemental funding to the IMF, is among the nations that have been approached by the organization for fresh commitments. Beijing has called for China and other emerging giants to gain more influence over major decisions on international bailout efforts.
The United States and some European nations agree that these large developing nations should have a greater voice. But to win that right, many say, China in particular needs to make more substantial contributions.
"Traditionally, contributions to supplemental accounts have been a way for countries to lay down a marker to play a larger role at the fund," said an IMF official who spoke on the condition of anonymity.
Skepticism
Response on Capitol Hill to the administration's move to seek money for the IMF was muted as several lawmakers said they would wait for the details.
But some predicted that such a request would be met with skepticism. Geithner's announcement came about three weeks after Obama signed a $787 billion stimulus package. And lawmakers already are starting to contemplate the possibility that more money will be needed.
House Speaker Nancy Pelosi (D-Calif.) said Tuesday that she is keeping "the door open" to more stimulus spending. And yesterday, House Appropriations Committee Chairman David R. Obey (D-Wis.) said he has asked his staff to begin thinking about what might be included in such a package.
But Christina Romer, chairman of the president's Council of Economic Advisers, said earlier this week that it's too soon to make such a decision and that the administration's efforts to get the economy back on track should be given time to work.
"Nobody should expect miracles or quick results," agreed Allen Sinai, chief economist of Decision Economics, who was among four economists who met Tuesday with House Democratic leaders. "I would counsel patience. Let some of these polices work."
The international talks this weekend precede a summit of 20 world leaders on April 2 in London aimed at developing a plan to address the world's financial crisis and economic slowdown.
Another major item on the agenda for this weekend's gathering is to make sure a unified, global regulatory reform effort is moving forward. Geithner said he wants to expand the membership of the Financial Stability Forum for world central bankers and regulators in Switzerland, and coordinate oversight of financial markets beyond the traditional banking sector.
Staff writer Lori Montgomery contributed to this report.
