If ever there was a time for bold US leadership, this is it. The bursting of the housing and credit bubbles has sent the world economy into steep decline. Unless the major
economies can rally around a common strategy for recovery, we could all descend into a deep and prolonged recession, if not a second Great Depression, with far-reaching consequences for political stability throughout the world. That is why Barack Obama’s first foreign policy trip–to the G-20 meeting in London and then to the NATO and US-European Union summits–may be one of the most important of his presidency. No doubt the formal results of these meetings will be disappointing, making it even more important that the president use them to build support for a bolder international plan.
Despite his considerable popularity, Obama will face obstacles as he strives to shape an international agenda. The president will have to overcome a legacy of resentment over not just the reckless and irresponsible policies of the Bush administration but also the Clinton administration’s arrogant proselytizing about the virtues of neoliberalism. Many Asian and Latin American leaders remember all too well Larry Summers and Timothy Geithner lecturing them to tighten their belts and close down troubled banks during the 1997-98 financial crisis.
The president will also have to deal with deep divisions among the major economies. It’s no secret that Germany and France are highly skeptical of more fiscal stimulus, that Japan’s leadership is in disarray and that China is pushing the idea of an international reserve currency in part to deflect attention from its practice of increasing exports at the expense of other economies. Finding common ground will not be easy.
But perhaps the greatest obstacle is the administration’s muddled message and unclear priorities. At times it seems to be torn between a Keynesian reform agenda in the mold of FDR and a neo-Rubinite plan to preserve the dominance of Wall Street-led capitalism (albeit with a bit more regulation). The administration seems just as divided when it comes to its international priorities–between the overriding need to focus on global economic recovery and what it perceives as the equally important need to pursue the “war on terror” and prevent Russia from reasserting its power.
The administration did little to clarify its philosophical approach or its goals in advance of the G-20 meetings. In a March 24 op-ed that ran in thirty newspapers worldwide, President Obama struck many of the right notes with his call for bold action to jump-start the global economy. But a day earlier Treasury Secretary Geithner took a different tack when he unveiled a bank bailout plan that seems more concerned with saving Wall Street’s proprietary trading than with ensuring that American businesses and homeowners have access to credit and capital.
If the administration is to lead the world toward recovery, it must be clear about its aims. One of Obama’s top goals must be to outline plans to reverse the free fall in global demand and stop the surge of unemployment. The International Labor Organization estimates that more than 30 million jobs will be wiped out by the global recession; that number could easily grow to 50 million if the downturn deepens. As he meets with G-20 leaders, the president should pay less attention to Wall Street and more to the international coalition of labor unions, which is calling on world leaders to commit sufficient funds to fight the recession, protect workers’ rights and extend social services for the unemployed.
The best way to stem the tide of rising unemployment is for all the major economies, especially the large current-account- surplus economies like China and Germany, to increase their fiscal stimulus. But in the face of resistance from Germany and France, the administration has quietly dropped its call for G-20 countries to commit 2 percent of GDP to economic expansion. It must put a stronger stimulus back on the agenda by building a larger coalition behind that idea. Otherwise the United States will once again find itself bearing a disproportionate share of the burden of providing demand for the world economy.
Another way to stimulate global demand and create jobs is to increase aid to developing economies, which through no fault of their own are being hit hard by the downturn. Private capital flows to these countries have dried up, leaving many of them with debt problems reminiscent of the 1997-98 crisis. The preliminary report of a United Nations commission on international economic reform, chaired by Joseph Stiglitz, estimates that “some 200 million people…could be pushed into poverty if rapid action is not taken to counter the impact of the crisis.” Once again, the Obama administration has sent mixed messages. It has supported increasing the International Monetary Fund’s credit facility to $500 billion (from its estimated $200 billion) for helping economies in debt crisis. But it has not been as vigorous as it should be in advancing other ideas, like allocating new Special Drawing Rights to help developing economies pursue countercyclical policies or establishing a larger recovery fund to increase support for job-creating projects in these countries.
The administration’s preparations for the NATO and US-European summits are also muddled. On March 27, just a week before the NATO summit, the administration announced plans to escalate fighting against the Taliban and Al Qaeda, signaling that it is as concerned about the threat from terrorists operating from remote areas of Afghanistan and Pakistan as by the broad instability a global depression would bring. By announcing this on the eve of the summit, the administration signaled its hope to secure more NATO assistance–at least more nonmilitary assistance–for the war. This not only ignores the reservations most European members have about the Afghan mission but also overlooks what must be the main focus of US-European cooperation looking ahead: the extremely worrying situation in Central and Eastern Europe, particularly the risk of an economic meltdown in Ukraine.
In light of the crisis gripping that region, it seems quixotic to make Afghanistan the key test for NATO. So does the administration’s tortured strategy of keeping open the prospect of NATO membership for Ukraine and Georgia while trying to improve relations with Moscow. Obama should acknowledge the long history of the NATO alliance, but he should understand that NATO may have outlived its usefulness and that the effort to expand its mission into Afghanistan or the former Soviet Union could destabilize the post-cold war peace. He might also take note of the diverse coalition of activists planning demonstrations, conferences, workshops and nonviolent blockades to coincide with the sixtieth anniversary of NATO. The true test of US-European cooperation is not Afghanistan or expanding NATO; it’s whether the United States can work with Europe–and, in the case of Ukraine, whether it can work with Russia–to prevent a new iron curtain from dividing Europe into a rich, stable West and a poor, unstable East.
President Obama, of course, is correct that his administration must tackle more than one challenge at a time. But it must be wise in its choice of which challenges it takes on, especially when it needs help with them. Understandably, other countries are less inclined to follow America’s lead than they once were. All the more reason for the Obama administration to be clear about its goals and to explain that it is concerned about the welfare of all nations, not just ours.