US dysfunction clouds economic diplomacy efforts

As Treasury Secretary Janet L. Yellen arrives in Morocco this week to meet with her international counterparts, she will represent a nation that has led the world’s post-pandemic economic recovery but is now grappling with potentially destabilizing political dysfunctions.

America came perilously close to a debt default over the summer and tiptoed toward a government shutdown last month as Republicans battled over the appropriate level of federal spending and whether to fund more aid to Ukraine. Those events culminated in last week’s ouster of Representative Kevin McCarthy as speaker of the House, a development that raises questions about whether the United States can really govern itself, let alone lead the world.

The political dynamic is expected to dent the credibility of the United States at the annual meetings of the International Monetary Fund and the World Bank, which begin on Monday in Marrakesh. Ms Yellen is expected to press European governments to provide more funds to Ukraine and push creditors such as China to release the debts of poor countries, including many African nations.

The meetings come amid heightened global uncertainty over attacks by Hamas on Israel over the weekend, which threaten to escalate into a regional conflict. The possibility of a wider war could present new economic challenges for policymakers by raising oil prices, disrupting trade flows and inflaming tensions between other nations.

While traveling in Morocco, Ms. Yellen reaffirmed American support for Israel.

“The United States stands with the people of Israel in condemning yesterday’s horrific attack on Israel by Hamas terrorists from Gaza,” Ms Yellen said in a post on X, formerly Twitter, on Sunday. “Terrorism can never be justified and we support Israel’s right to defend itself and protect its citizens.”

In an interview on Sunday during her flight to Marrakesh, Ms. Yellen acknowledged that other nations are concerned and worried about the political gridlock that has engulfed the United States. However, she noted that other democracies face similar obstacles and that she believes America’s allies will continue to support the Biden administration’s efforts on issues such as protecting Ukraine and addressing climate change.

“I think they’ve been thrilled over the last two years to see the United States reassume a very strong global leadership role and want to work with us and want us to be successful,” Ms. Yellen said.

Yet America’s role as an economic bulwark against Russia’s war in Ukraine has been undermined by its own domestic politics, including Republican opposition to providing greater economic support to Ukraine. The United States’ massive debt and its inability to find a more sustainable fiscal path have also hurt its economic credibility.

“The rest of the world can only watch with trepidation at our dysfunction — reeling from threats of default, shutdown, House adjournment because there is no speaker,” said Mark Sobel, a former longtime Treasury official who is now the US chairman of the Forum of Official Monetary and Financial Institutions. , think tank. “While foreign governments have always expected a certain degree of hasty behavior from the US, the current level of dysfunction is sure to erode confidence in US leadership, stability and reliance on the global role of the dollar.”

Eswar Prasad, former head of the IMF’s China department, added that the instability of the US economy could be problematic for some of the world’s most vulnerable economies that rely on America as a source of stability.

“For countries that are already struggling to support their economies and financial markets, additional uncertainty from the political drama in Washington is highly undesirable,” Prasad said.

The rally comes at a delicate time for the global economy. While the world appears poised to avoid recession and achieve a so-called soft landing, fighting inflation remains a challenge and output is tepid. China’s economic weakness and Russia’s ongoing war in Ukraine remain obstacles.

The higher borrowing costs used by central banks to tame inflation have also made it harder for countries to manage their debt.

It’s a problem around the world, including in the United States, where the gross national debt is just over $33 trillion. Foreign appetite for government bonds has been weak in recent months, and concerns about the sustainability of US debt have become more prevalent. This makes it somewhat more challenging for the United States to advise other nations on how they should manage their finances.

Ms. Yellen’s most challenging task will be convincing other countries to continue providing strong economic aid to Ukraine as its war with Russia drags on. With European nations dealing with economic stagnation and Congress in disarray, it’s unclear how the US will continue to help Ukraine prop up its economy.

Ms. Yellen said she would tell her colleagues that support for Ukraine remains a top priority. Explaining that the Biden administration has no good options for providing aid on its own, she urged Congress to approve additional funds.

“We basically have to get Congress to approve this,” Ms. Yellen said. “There is no gigantic pool of resources that we don’t need Congress to provide.”

Dismissing concerns that the US could not afford to support Ukraine, Ms Yellen argued that the cost of letting the country fall into Russia’s hands would ultimately be higher.

“If you think about the national security implications for us if we allow a democratic country in Europe to be overrun by Russia and what that will mean in the future for our national defense needs and the needs of our neighbors, we can’t afford it” , Ms. Yellen said.

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