David Lipton is a man of firm convictions — particularly regarding himself and the role he plays. He consistently comes across as a man deeply pursuaded of his own importance; self-doubt is not an emotion he is overly familiar with. During past visits to Berlin, the American has demonstrated a fondness for presumptuous rhetoric and a pedantic tone when instructing his hosts about their shortcomings.
Germany’s budget and trade surpluses are too high, he used to insist, and Berlin invests too little. The country should likewise show a little more generosity toward Greece, pressing less for austerity and forgiving more debt, says Lipton, who is, after Christine Lagarde, the No. 2 figure at the International Monetary Fund (IMF).
Recently, the deputy IMF head was once again in Berlin. But this time, the people he met with — government representatives and parliamentarians — were introduced to a whole new side of Lipton. “He was friendly, attentive and thoughtful,” one participant reported after a meeting.
There is a reason for the shift. And he has a name: Donald Trump.
The world has become an unsettled place since the new American president took office — not just for Lipton, but for the entire IMF. No, he told his hosts, rising prices for commodities aren’t the greatest risk for the global economy, and neither are financial or currency crises. The true threat is that of a “geopolitical recession,” the American told them. The reference is to political developments like Brexit, but even more to populist economic policies from the new U.S. government that call for the erection of trade barriers and could throw the global economy off track.
Lipton’s reservations transcend party lines and animosities. Sure, the deputy IMF head may have Democratic Party leanings; he was appointed to his post by the Obama administration. And as a high-ranking employee for many years in the U.S. Treasury Department, he counts among the political elite that Republican President Trump is now waging war against.
But the worries harbored by the finance professional are in no way unjustified given that Trump and his team have placed a question mark over just about everything the IMF has stood for in its 70 years of existence: the benefits of free trade, open and liberalized markets and, not least, international solidarity when a country runs into financial difficulties.
The new American government, by contrast, is placing its emphasis on isolation, import barriers and the one-sided assertion of its own interests. During his inaugural address, Trump sang a hymn to unilateral economic policies. “Protection will lead to great prosperity and strength,” he said.
The real-estate mogul appears to be alone in his analysis. If he were right, then North Korea would be an economically powerful land of plenty.
The fact is that Trump’s market nationalism stands in stark contrast to the vast majority of economic theory over the past 250 years. In particualar, it clashes with the fate of similar policies put in place in the early 1930s. The retreat from free trade merely exacerbated the raging Great Depression. Prosperity shrank dramatically and millions of workers in Western countries lined up at unemployment centers and soup kitchens.
The week before last, the White House newbie and his team offered a preview of how serious they are about their economic policy ego trip. During her visit to Washington, Trump told German Chancellor Angela Merkel he wanted “fair trade” and complained that the U.S. had been taken for a ride with previous agreements.
His treasury secretary Steven Mnuchin issued the same complaints, verbatim and at the same time, during a meeting of G-20 member states in Baden-Baden, Germany. True to his mandate, he also prevented the inclusion of the pledge against protectionism that had always been part of such closing statements in past.
Trump and his team seem to be emitting an astoundingly un-American sense of self-pity, presenting the world’s last remaining super power as global trade’s loser. This, however, overlooks the fact that the United States itself is largely responsible for globalization and opened up markets around the world for its companies and products. Earlier administrations had few inhibitions when it came to using their influence within international organizations like the IMF or the Organization for Economic Cooperation and Development (OECD), which spent decades preaching the gospel of open markets for goods and services. The U.S. is the largest contributor to the budgets of both organizations and it can also easily block important resolutions. It is extremely difficult for other countries within the organizations to successfully challenge the will of the Americans.
Today, though, American economic expansionism has given way to whiny victimization. No one knows for how long the self-centered hegemon is prepared to continue working with international organizations, for how long the U.S. will continue to participate in bodies like the G-7 group of Western industrialized nations or even the G-20.
Pressure for Greater German Leadership
Lipton and Lagarde view Washington’s new political direction as no less than an attack on global economic peace. To save what can be saved, both are now looking to Germany of all countries.
As Lipton attended appointments in German parliament and the Finance Ministry, IWF head Lagarde paid a courtesy visit to Chancellor Merkel. Both came to Berlin with the same message: The Germans need to assume a greater leadership role in Europe. They need to fill the vacuum the Americans are leaving in their wake — at the IMF, but also within the G-7 and the G-20.
IMF chief Christine Lagarde (left) speaks with Angela Merkel (right) at the Chancellery in Berlin.
Merkel’s government, it seems, is going to have to get used to the idea that it is now the leader of the free West and that the fate of the liberal world order is now in Germany’s hands. In his meetings, Lipton said that other major economic powers like Britain or Japan could not be relied upon, noting caustically in the private meetings that the leaders of those countries couldn’t seem to ingratiate themselves with Trump quickly enough.
Merkel was flattered, but also reserved in her response.
Just how important Germany has become to the IMF can be seen in policies relating to Greece. Recently, after close to a year-and-a-half of dispute, the IMF surprisingly shifted its position on Greece to back the German government’s demand for long-term primary budget surpluses from Athens. The question of debt relief, also an enduring bone of contention, has now apparently been delayed until next year.
The IMF leadership, in short, is loathe to create any additional difficulties for its last reliable ally. There are more important things at stake than Greece: namely the future of the international financial architecture, global trade and the role the organization plays in the global economic system.
For the Greek government, the political shift in Washington isn’t making things any easier. Athens used to be able to rely on the Obama administration to apply pressure on Europe and the IMF to reach favorable deal with Greece for the sake of the global economy. With Trump in the White House, however, Prime Minister Alexis Tsipras can no longer rely on that kind of backing. It seems likely that Trump cares as little about the fate of the small Mediterranean country as he does about the well-being of the global economy.
At this stage, it remains entirely unclear what kind of relationship the new American government will develop with the IMF. Christine Lagarde telephoned twice with Mnuchin before the meeting in Baden-Baden and the two ate together once, but she and her staff are still in the guessing stages as to what the Trump administration is planning.
Publicly, the IMF has been wary of criticizing its most important donor. So far there’s been nary a word of warning about the potential damage Trump administration policies could inflict on growth and prosperity. IMF sources say this is the traditional position. They say that too little is known about possible border adjustment taxes, punitive tariffs or the planned bilateral trade agreements to comment on them at this point. Such statements will only be issued once those plans become more concrete, they say.
It is odd, however, that the IMF adjusted its economic growth forecast earlier this year, issuing an upward revision for the U.S. The decision, officials said, was based on tax relief and expenditures on infrastructure that have been announced by the Trump administration.
The real test will come this summer when the IMF assesses American economic policies in the context of its Article IV consultations as it does annually with each member state. Generally, the organization is known for showing little regard to the sensitivities of the governments under review.
Uncertainty, Anxiety, Helplessness
The OECD likewise seems to be taking a cautious approach at the moment. Not a word has been heard from the organization about Trump’s potentially damaging trade and tax policy proposals. With so many tax reform plans under consideration, OECD Secretary-General Angel Gurría said in Baden-Baden, it is too early to judge. He did, however, welcome the infrastructure investments that have been announced by the administration.
Yet concerns about the direction the U.S. might take have been making the rounds at OECD headquarters in Paris for some time now. In his first budget draft, Trump ordered cuts to the contributions paid by the U.S. to a number of international organizations in areas like development aid, but also economic cooperation. “We have to wait and see how it affects us, but it appears inevitable that it will,” a Gurría staffer says.
Uncertainty, anxiety and helplessness: Such are the emotions being triggered by the Trump administration, even among its traditional allies. And the message coming from Washington seems clear: First, we are going to do what we want. And second, we are going to do that which benefits us.
A good example of this was the recent disconcertment unleashed by Treasury Secretary Mnuchin during his visit to Baden-Baden. His mechanical reading of his prepared statement was so rote that it was unclear if it reflected his views or whether it had been dictated by the White House. Either way, the newcomer’s stubbornness also had an unexpected effect. “Seldom have I seen representatives of the EU present such a united front,” said one participant, who has taken part in such negotiations for years. All EU representatives, he said, pleaded to preserve free trade and condemn protectionism.
Brazil’s finance minister also issued words of warning to Mnuchin, saying that his country’s own experience with protectionism has been a painful one. It doesn’t help anyway, he said. On the contrary, it just makes poor people even poorer. But the Americans don’t seem prepared at this point to learn from the mistakes of others.
A G-20 Summit Debacle?
The person who seemed to suffer most at the meeting was German Finance Minister Wolfgang Schäuble of Merkel’s conservative Christian Democratic Union, who, as host, had to hold back his annoyance and instead assume a mediating role — one that ultimately bore no fruit. Chancellor Merkel will have to take on a similar role at the upcoming G-20 summit in Hamburg in July.
Indeed, rather than basking in the glow of the prestigious role during an election year, Merkel and Schäuble are faced with managing yet another crisis. If the U.S. doesn’t change its political course between now and the summit, the German G-20 presidency could end in disaster.
As such, it is cold comfort that Germany has become the go-to place for the countries most troubled by Trump. Representatives of Japan and South Korea are currently seeking to close ranks with Germany.
The three countries share similarities that make them suspicious to the Americans: They all generate substantial trade surpluses with the United States because they export more products to the country than they import from it. All three countries are also dealing with the problems associated with aging societies and tend to save more than the Americans would like to see. And, last but not least, all three spend less money on defense than Trump would like and rely too heavily on the United States for their protection. The South Koreans and Japanese have now proposed coordinating their positions with Germany in order to gird themselves from the accusations coming from Washington.
Within the G-7, confidential meetings are also now taking place at all possible levels — and without the presence of the Americans. All sides want to know what the others are thinking about the outlandish statements and actions coming out of Washington and how best to react to them.
The IMF’s spring meeting is scheduled to take place the week after Easter. Traditionally, it is also a time for the finance ministers of the G-7 and G-20 to hold talks. The main question hovering over the talks is whether the Americans will attend. And if they do, how will they behave?