Large Nations Consider Economic IMF Aid as Smaller Ones Collapse

Japan would consider a series of bilateral loans to the International Monetary Fund as the organization seeks $600 billion to bolster its accounts as a means to help bail out the economies of some of Europe’s financially weakened nations. Reuters reports that Japanese leaders will  contribute only if the more healthy EU nations provide substantial aid packages of their own, probably through the European Financial Stability Facility. At this point, the aid, particularly from Germany and France, seems likely as these countries try to preserve the viability of the euro.

Japan’s contributios to the European cause could encourage developing nations like China and debt-laden nations like the U.S. to make loans to the IMF as well.

China’s argument against direct aid to Europe is that the region’s problems are its own. Rumors indicate that the People’s Republic might directly buy sovereign debt issued by countries such as Spain. So far, that has not come to pass. China could be experiencing a change of heart. Recent data on its GDP growth and factory activity should encourage China to invest in financial facilities like the IMF. That would increase the ability of European businesses and consumers to buy Chinese exports when the sovereign debt crises improve through aid.

Japan is not well-positioned to offer help to the IMF because of economic and deficit problems of its own. The earthquake last March was a large and unexpected setback to its already troubled economy. The national debt levels of Japan often are said to be unsustainable. However, its leaders clearly believe that without a healthy Europe, any recovery of its economy will be undermined.

The most likely large holdout to IMF aid is the United States. The mood in Washington is that only government cost cuts can save America from its own sovereign debt problems. That makes multibillion aid packages impossible. Yet, even with voter resistance to additional government expenditures, political leaders may quickly realize that GDP cannot expand and unemployment cannot improve much if the largest region in the world, based on gross domestic product, falls into deep recession.

The U.S. can try to rely on countries like China, Japan and Germany to revive Europe’s fortunes. But if America withdraws as a contributor, the question of why the world’s most wealthy nation refuses to help may undermine any effort to make the rescue of Europe a completely international operation. That, in turn, could prompt China and Japan to reconsider their own contributions. If the U.S. will not bolster chances of an improvement of its own export levels, who will?

Japan is about to make a gesture that shows it will support IMF initiatives. That gesture could disappear without a similar one from America.

Douglas A. McIntyre