With the arrival of Treasury Secretary Janet L. Yellen heads to Morocco this week to meet her international counterparts. She will represent a country that led the world’s economic recovery after the pandemic but is now suffering from a potential political imbalance that could lead to destabilization.
America came perilously close to defaulting on its debt over the summer and tiptoed toward a government shutdown last month, as Republicans battled over appropriate levels of federal spending and whether to fund more aid to Ukraine. Those events culminated last week in the ouster of Representative Kevin McCarthy as Speaker of the House of Representatives, a development that raises questions about whether the United States is truly capable of governing itself, let alone leading the world.
The political dynamic is expected to strain US credibility at the annual meetings of the International Monetary Fund and World Bank, which begin Monday in Marrakesh. Ms. Yellen is expected to press European governments to provide more financing for Ukraine and push creditors such as China to provide debt relief for poor countries, including several African countries.
The meetings are being held amid heightened global uncertainty due to the weekend attacks by Hamas on Israel, which threaten to turn into a regional conflict. The prospect of a broader war could pose new economic challenges for policymakers by pushing up oil prices, disrupting trade flows, and inflaming tensions between other countries.
While traveling to Morocco, Ms. Yellen affirmed America’s support for Israel.
“The United States stands with the people of Israel and condemns yesterday’s horrific attack against Israel by Hamas terrorists from Gaza,” Yellen said in a post on X, formerly Twitter, on Sunday. He added: “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 trip to Marrakesh, Ms. Yellen acknowledged that other countries are concerned and concerned about the political stalemate 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 over the last couple of years they have been happy to see the United States resume a very strong global leadership role, and they want to work with us and they want us to be successful,” Yellen said.
However, America’s role as an economic bulwark against Russia’s war in Ukraine has been undermined by its own domestic policies, including Republican opposition to providing more economic support to Ukraine. The United States’ huge debt burden and inability to find a more sustainable fiscal path have also damaged its economic credibility.
“The rest of the world can’t help but look aghast at the fear of our dysfunction — from threats of default, to shutdowns, to adjournments of the House over… Having a president.” Chairman of the official US Monetary and Financial Institutions Forum, a think tank. “While foreign governments have always expected a degree of impulsive American behavior, the current level of dysfunction will almost certainly erode confidence in American leadership, stability, and reliance on the dollar’s global role.”
Eswar Prasad, former head of the China Department at the International Monetary Fund, added that instability in the US economy may pose a problem for some of the most vulnerable economies in the world that depend on America to be a source of stability.
“For countries already struggling to support their economies and financial markets, the additional uncertainty caused by the political drama in Washington is not welcome at all,” Prasad said.
The meeting comes at a sensitive moment for the global economy. While the world appears poised to avoid recession and achieve a so-called soft landing, combating inflation remains a challenge, and output remains tepid. China’s economic weakness and Russia’s ongoing war in Ukraine remain headwinds.
High borrowing costs deployed by central banks to tame inflation also made it difficult for countries to manage their debt burdens.
This is a problem around the world, including in the United States, where the total 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 widespread. This makes it somewhat more difficult for the United States to advise other countries on how to manage their finances.
The most challenging task for Ms. Yellen will be convincing other countries to continue providing strong economic aid to Ukraine as its war with Russia continues. European countries are facing economic recession, and with Congress in chaos, it is unclear how the United States will continue to help Ukraine support its economy.
Ms. Yellen said she would tell her counterparts that supporting Ukraine remains a top priority. She explained that the Biden administration lacks good options to provide assistance on its own, and called on Congress to allow additional funding.
“Basically we have to get Congress to agree to this,” Ms. Yellen said. “There is no huge pool of resources that we don’t need Congress for.”
Yellen dismissed concerns that the United States could not afford to support Ukraine, and said the cost of allowing the country to fall into Russia’s hands would ultimately be higher.
He added: “If you think about the national security consequences for us if we allowed Russia to invade a democratic country in Europe, and what that would mean in the future for our national defense needs and the needs of our neighbors, we can do that.” “I can’t stand it,” Ms. Yellen said.
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