Speaking frankly

As the time of "fiscal cliff" is fast approaching, there is almost no time left for niceties or subtle remarks to nudge the US policy planners to adopt a reasonable attitude. Speaking on CNN's State of the Nation, IMF Managing Director, Christine Lagarde warned the US that it had the potential to be its "own worst enemy" over the fragile economic recovery and growth could plummet to zero if it failed to reach a comprehensive settlement over the "fiscal cliff".
In that case, markets would react quickly and "the stock market would take a hit". Besides, all the current signs of optimism about the economy including falling unemployment, the housing sector bottoming out and reduced household debt would be negated. She also predicted that diverse landscape of the US economy "could be significantly improved or worsened by the fiscal cliff, fiscal deficit and the debt of the country - the three topics that can be addressed now in a comprehensive fashion."
The real message Lagarde was hoping to deliver was that failure to reach a comprehensive deal on these factors could hurt the US far more than anyone else because US was more exposed to its own difficulties and issues and it was such a big player in the world. "We can be our own best friends or our own worst enemy," she concluded.
It is not only the IMF but almost the whole world which is watching the US response to its 'fiscal cliff' with bated breath because of the huge implications it could have for the US as well as the global economy. Deadline of January 1, 2013, in common paralance, has come to be known as "fiscal cliff". If the US Congress does not act by that date, a package of $600 billion spending cuts and tax rises will automatically kick in, sending shock waves around the world that could even damage the slow and laborious economic improvements being made across the EU. Of course, the US Congress and the administration are working overtime to sort out the relevant issues but wide differences still persist and nobody could be sure about the final outcome. There are always chances of a reasonable compromise before the deadline but at the same time the possibility of disagreement leading to automatic application of the package of measures envisaged for a deficit cut of $600 billion cannot be entirely ruled out. As the clock is ticking, the possibility of lack of positive action is becoming more real, raising all kinds of apprehensions everywhere and at all levels. Although, the composition of world economy has changed a lot over the last two decades or so but still the size of the US economy is so large that the whole world could catch cold if it sneezes. It needs to be noted, however, that Christine Lagarde was not the first one to voice concern over the 'fiscal cliff'. Almost all the top officials and economists across the world are worried about the issue and analysing the situation from various angles. It is the open and blunt manner in which the Fund's Managing Director has highlighted the problem that distinguishes her from others. As the guardian of global monetary order and with a mandate to promote the free flow of international trade, the IMF must be feeling increasingly uneasy over the delay in reaching a compromise on this issue and is now trying to nudge the US Congress to behave in a positive fashion by reminding that the damage to the US economy would also be monumental in case of failure. Lagarde seems to have done her duty by coming out of the line and talking in a straight fashion though it is difficult to assess the impact of her remarks on the resolution of the US fiscal policy imperatives. In all probability, the US Congress and the administration are not likely to accord much importance to her observations because they are not beholden to the IMF and don't need its support. In fact, this is the biggest weakness of the global economic system, which is presently dominated by a few developed countries through multilateral institutions and agencies. These countries dictate their policies and easily ignore their analyses and advice due to their clout and complete hold on world bodies while the developing countries, particularly the poor, are forced to pursue a particular reform agenda and toe their line when they seek their assistance to stabilise their domestic economies. In order to ensure an equal impact of the advice of the Breton Woods's institutions, the mindset of the developed countries needs to change significantly which seems very difficult at the present juncture. Unfortunately, however, rules of the game are always dictated by economically and politically powerful countries in the world while the weak have no other choice but to submit grudgingly.