Speaking to a Toronto audience before Christmas, former Bank of Canada governor David Dodge identified an underappreciated reason for why the European debt crisis has dragged on for so long.
In the past, the "Americans were willing to step up and then everybody came along," Mr. Dodge said during a panel discussion hosted by Toronto-Dominion Bank. "We don't have that any more."
Mr. Dodge's comments come to mind this morning in the aftermath of the latest marathon negotiating session by euro zone finance ministers to avoid financial disaster. After 13 hours, officials completed an agreement on a new multi-billion-euro aid program for Greece.
Market reaction to the agreement is muted. That reflects the assumption that European ministers would come up with an agreement and the realization that many obstacles remain before this gauntlet is completed. The volatile politics of Greece could force Athens to backtrack on any number of its commitments. And the rest of Europe must now turn its attention to securing agreement on an enhanced "firewall," a financial backstop that will be big enough to convince bond traders that they can buy European sovereign debt without fear of default.
The worries are hardly new. So why have they been allowed to persist for so long, especially since the solutions are widely known.
For Mr. Dodge, it's the notable absence of the Americans, who have been central players in sorting out most every major economic crisis since the Second World War. Remember the Committee to Save the World? Treasury Secretary Robert Rubin and Federal Reserve chairman Alan Greenspan took it upon themselves to end the Asian financial crisis, using the heft of the world's largest economy to backup intervention by the International Monetary Fund. Something similar happening in the 1980s, when the U.S. ended the LDC (less-developed-country) debt crisis.
But when it comes to Europe, the U.S. is notable mostly for its absence. Treasury Secretary Timothy Geithner issued a statement over the weekend endorsing the Greek government's economic program. Mr. Geithner also has made a couple of visits to Europe to "share" ideas on what could be done. But the Obama administration's involvement otherwise has been hands off. Far from bolstering the IMF's effort to take a more significant role in the crisis, the U.S. opposes the fund's call for a $500-billion increase in reserves. Assuming the European debt crisis is eventually resolved, it will be the first major global economic calamity to end without a major role for Washington.
There are reasons for this. Europe is rich, and deep in technical ability, and presumably should be able to sort this situation out on its own. The U.S. too is hardly in excellent fiscal health, and is constrained by how much money it could bring to the table. And the current politics in Washington are such that any attempt by the administration to get more involved would be vigorously opposed by Republicans in Congress. Few presidents would risk stoking that fire in an election year.
For non-Americans, the rise of economies such as China and Brazil offer a future where global economic policy will no longer be set in Washington. But the persistence of the European debt crisis shows that the path to this multi-polar world will be a difficult one. A day when global economic power is more equally shared may come. But for now, there appears to be very little leadership at all.
"The problem today is there is no partner for the IMF to play the role which the IMF could certainly play in this circumstance," Mr. Dodge said at the TD event. "They can't do it alone…The United States I'm not sure is unable, but it's certainly unwilling to step up. The Chinese claim that they are only a small country and that they're not a major global player and so it's not up to them to do anything. So the IMF can't do it."